Tunneling through related-party loan guarantees: evidence from a quasi-experiment in China

Tunneling through related-party loan guarantees: evidence from a quasi-experiment in China We use the balance of outstanding related-party loan guarantees (RPLG) issued by Chinese listed firms as a direct measure of tunneling. By adopting institutional perspectives and a difference-in-differences approach, we show that firms increased RPLG after the 2008 enterprise income tax reform. More importantly, domestic firms had larger increases of RPLG compared to foreign-invested firms during the post-reform period. This treatment effect is in line with domestic firms’ higher exposures to weak corporate governance, inefficient banking system, and weak legal environment in China. Further analysis shows that the treatment effect is stronger for private controlled domestic firms than government controlled domestic firms. Finally, the propensity of tunneling also increased after the tax reform for all types of firms but the treatment effects on the propensity of tunneling are insignificant. Our findings are robust in models control for firm exposure to the global financial crisis of 2008–2009. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Tunneling through related-party loan guarantees: evidence from a quasi-experiment in China

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Publisher
Springer Journals
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-015-0523-3
Publisher site
See Article on Publisher Site

Abstract

We use the balance of outstanding related-party loan guarantees (RPLG) issued by Chinese listed firms as a direct measure of tunneling. By adopting institutional perspectives and a difference-in-differences approach, we show that firms increased RPLG after the 2008 enterprise income tax reform. More importantly, domestic firms had larger increases of RPLG compared to foreign-invested firms during the post-reform period. This treatment effect is in line with domestic firms’ higher exposures to weak corporate governance, inefficient banking system, and weak legal environment in China. Further analysis shows that the treatment effect is stronger for private controlled domestic firms than government controlled domestic firms. Finally, the propensity of tunneling also increased after the tax reform for all types of firms but the treatment effects on the propensity of tunneling are insignificant. Our findings are robust in models control for firm exposure to the global financial crisis of 2008–2009.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: May 30, 2015

References

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