Cross-ownership and tunnelling: evidence from China

ABSTRACT

The phenomenon that firms form association through the same shareholders widely exists in the global capital market. Using the data of China’s listed firms from 2008 to 2018, we examine whether cross-ownership can restrain the tunnelling behaviour of controlling shareholder. We find that cross-ownership can significantly reduce the tunnelling behaviour of controlling shareholders. It survives a series of endogeneity tests and robustness tests. Further analysis shows that the information advantage and governance experience are the two potential mechanisms through which cross-ownership affects tunnelling. Meanwhile, cross-ownership plays the positive role in restraining tunnelling mainly by increasing shareholding ratio and appointing directors. Moreover, this effect is more pronounced in firms with lower equity concentration, less analyst coverage and worse reputation of auditors. This paper not only highlights the critical role played by cross-ownership in shaping micro-economic behaviours by providing novel evidence from emerging markets, but also has some crucial implications for capital market supervision and industry antitrust policy-making.

KEYWORDS:

• Cross-ownership
• tunnelling
• information advantage
• governance experience advantage

JEL CLASSIFICATION:

• G32
• G34
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For example, in 2019, the notorious financial fraud of Kangmei pharmaceutical broke out in China. In this case, Kangmei has provided non-recurring funds to controller and its related parties without authorization procedures. It is used to purchase stocks, repay the principal and interest of financing on behalf of controller, advance the mortgage payment or pay the purchase premium, etc., occupying a record 11.6 billion yuan of funds.

² In 2019, China’s domestic institutional investors accounted for only 11.6% of the market value of A-shares. In the same period, the data in the United States was 43%, in Germany it was 19% and Japan 29%. https://pic.bankofchina.com/bocappd/rareport/202104/P020210408623859712807.pdf.

³ We conduct a grouped mean test on the matched samples. There is no significant difference between the two groups of samples in Size, Lev, ROE, Growth, and Turn.

Additional information

Funding

The work was supported by the Humanities and Social Science General Program (Beijing, China) [21YJC630125]; Talent Training Funds for the “Double First-Class” University Construction Project of South China University of Technology (Guangzhou, China) [D6211870]; Natural Science Foundation of Guangdong Province(Guangzhou, China) [2021A1515110150]; National Natural Science Foundation of China (Beijing, China) [72002068]; Guangzhou Social Science Planning Program (Guangzhou, China) [2021GZGJ43].