Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong

We examine a sample of 328 filings of "connected transactions" between Hong Kong listed companies and their controlling shareholders during 1998-2000. We address three questions: What types of connected transactions are likely to lead to expropriation of minority shareholders? Which firms are more likely to expropriate? Does the market anticipate the expropriation? On average, firms earn significant negative excess returns both around the initial announcement of the connected transactions (from -2.5 per cent for firms making cash payments to directors to -5.9 per cent for firms selling equity stakes to their controlling shareholders) and during the 12-month period following the announcement (from -7.2 per cent for firms acquiring assets from their substantial shareholders to -21.9 per cent for firms selling assets to them). Excess returns are significantly negatively related to percentage ownership by the controlling shareholder. They are also significantly negatively related to proxies for information disclosure. The likelihood of undertaking connected transactions is higher for firms whose ultimate owners can be traced to mainland China. Finally, we find limited evidence that the market anticipates the expropriation by discounting firms that undertake connected transactions.

[1]  M. Firth,et al.  Information Content of Insider Trading Around Seasoned Equity Offering , 2003 .

[2]  R. Fisman.  Estimating the Value of Political Connections , 2001 .

[3]  Paul Brockman,et al.  Investor Protection and Firm Liquidity , 2003 .

[4]  Todd Mitton,et al.  A Cross-Firm Analysis of the Impact of Corporate Governance on the East Asian Financial Crisis , 2002 .

[5]  R. H. Pettway,et al.  Acquisition of Divested Assets and Shareholders' Wealth , 1987 .

[6]  Karl V. Lins,et al.  Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis , 2001 .

[7]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[8]  Richard L. Smith,et al.  Market Discounts and Shareholder Gains for Placing Equity Privately , 1993 .

[9]  Joseph P. H. Fan,et al.  Corporate Governance in Asia: A Survey , 2002 .

[10]  Florencio López‐de‐Silanes,et al.  Law and Finance , 1996, Journal of Political Economy.

[11]  Larry H. P. Lang,et al.  The Separation of Ownership and Control in East Asian Corporations , 1999 .

[12]  M. Zenner,et al.  The Role of Investment Banks in Acquisitions , 1996 .

[13]  M. Deloof,et al.  Equity sales in Belgian corporate groups: expropriation of minority shareholders? A clinical study , 2004 .

[14]  Karen H. Wruck.  Equity ownership concentration and firm value: Evidence from private equity financings , 1989 .

[15]  A. Shleifer,et al.  A Survey of Corporate Governance , 1996 .

[16]  Brad M. Barber,et al.  Improved Methods for Tests of Long-Run Abnormal Stock Returns , 1999 .

[17]  Theo Vermaelen,et al.  Market Underreaction to Open Market Share Repurchases , 1994 .

[18]  Florencio López‐de‐Silanes,et al.  Investor Protection and Corporate Governance , 1999 .

[19]  Stijn Claessens,et al.  Disentangling the Incentive and Entrenchment Effects of Large Shareholdings , 2002 .

[20]  B.,et al.  Measuring long-horizon security price performance , 2004 .

[21]  Ross L. Watts,et al.  Towards A Positive Theory of the Determination of Accounting Standards , 2006 .

[22]  Kose John,et al.  Asset sales and increase in focus , 1995 .

[23]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[24]  Diane K. Denis,et al.  International Corporate Governance , 2003, Journal of Financial and Quantitative Analysis.

[25]  Joseph P. H. Fan,et al.  Corporate Ownership Structure and the Informativeness of Accounting Earnings in East Asia , 2000 .

[26]  Larry H. P. Lang,et al.  Dividends and Expropriation , 2000 .

[27]  Andrei Shleifer,et al.  Agency Problems and Dividend Policies Around the World , 1998 .

[28]  A. Shleifer,et al.  Investor Protection and Corporate Valuation , 1999 .

[29]  Ownership Concentration, Asymmetric Information, and the Positive Announcement Effect of New Equity Placements , 2002 .

[30]  L. Qiao,et al.  Earnings Management to Tunnel: Evidence from China's Listed Companies , 2003 .

[31]  C. Branford-White.  The Financial Aspects of Corporate Governance , 2003 .

[32]  E. Friedman,et al.  Corporate Governance in the Asian Financial Crisis , 2000 .

[33]  Kee-Hong Bae,et al.  Tunneling or Value Addition? Evidence from Mergers by Korean Business Groups , 2000 .

[34]  Sung Wook Joh,et al.  Corporate governance and firm profitability: evidence from Korea before the economic crisis , 2003 .

[35]  René M. Stulz,et al.  Asset Sales, Firm Performance, and the Agency Costs of Managerial Discretion , 1994 .

[36]  Jun-Koo Kang,et al.  Corporate Governance and Firm Value: Evidence from the Korean Financial Crisis , 2002 .

[37]  Todd Mitton,et al.  Cronyism and Capital Controls: Evidence from Malaysia , 2001 .

[38]  Kose John,et al.  Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures , 1990 .

[39]  Sendhil Mullainathan,et al.  Ferreting Out Tunneling: An Application to Indian Business Groups , 2000 .

[40]  Kevin J. Murphy,et al.  Glamour, value and the post-acquisition performance of acquiring firms 1 We would like to thank Euge , 1998 .

[41]  Andrei Shleifer,et al.  Corporate Ownership Around the World , 1998 .