Does the Market Understand the Ex Ante Risk of Expropriation by Controlling Shareholders?

55 Pages Posted: 6 Apr 2021

See all articles by Yan-Leung Cheung

Yan-Leung Cheung

The Education University of Hong Kong

P. Raghavendra Rau

University of Cambridge

Aris Stouraitis

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Weiqiang Tan

The Education University of Hong Kong; Education University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2021

Abstract

We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm’s balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.

Keywords: International corporate governance, Expropriation, Operating assets, Cash holdings, Intra-group loans, Pyramids, Tunneling

JEL Classification: G15, G30, G34

Suggested Citation

Cheung, Yan-Leung and Rau, P. Raghavendra and Stouraitis, Aristotelis and Tan, Weiqiang, Does the Market Understand the Ex Ante Risk of Expropriation by Controlling Shareholders? (April 2, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3818025

Yan-Leung Cheung

The Education University of Hong Kong ( email )

Department of Social Sciences
10 Lo Ping Road, Tai Po, New Territories
Hong Kong
Hong Kong

P. Raghavendra Rau (Contact Author)

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

Aristotelis Stouraitis

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

Weiqiang Tan

The Education University of Hong Kong ( email )

Tai Po
Hong Kong
Hong Kong

Education University of Hong Kong ( email )

Dept of Social Sciences
Education University of Hong Kong
Tai Po, NT 11111
Hong Kong

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