This paper examines the effect of excess control rights on the leverage decisions made by Chinese non-SOEs before and after the Non-tradable share reform (NTS reform). We find that firms with excess control rights have more excess leverage and their controlling shareholders use the resources for tunneling rather than investing in positive NPV projects. We also find that excess leverage in firms with excess control rights decreases and the market reaction to announcements of related party transactions are more positive after NTS reform. This confirms that tunneling by the controlling shareholders actually reduced. We argue that in emerging markets where legal protection for creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel through inter-corporate loans and related party transactions. Furthermore the privatization of these economies can reduce the controlling shareholders' tunneling activities and associated excess leverage which destroys firm value.

This study investigates how managerial professional connections, through executives' membership of an industry association, play a role in helping firms obtain trade credit, while political connections do not. We document that firms whose managers have professional connections receive more trade credit, especially in firms that are not controlled by the state (non-SOEs), which have limited access to formal financial resources. The business environment, for example, low social trust and high product market competition, also strengthen the positive relationship between managers' professional connections and firms' access to trade credit. We further provide evidence that directors' professional connections also bring firms more trade credit and that firms with professional connections make more use of financing component of trade credit and abnormal trade credit. Our results are robust to a series of robustness and endogeneity tests. Overall, we argue that managerial professional connections, other than political connections, help firms, especially those with limited access to formal financing, to obtain informal financing resources.

This study examines the effect of family control on the cash holding policy in China. We find that family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders. We further show that the incentive for controlling families to hold cash and for tunneling is exacerbated by the agency conflict between controlling and minority shareholders, i.e., it is weakened after the Chinese Non-tradable share (NTS) reform and strengthened by the presence of multiple large shareholders who probably play no monitoring role in Chinese family firms. Furthermore, family firms’ incentive to hold cash for tunneling is influenced by the unique characteristics of Chinese firms in the following ways: the incentive is stronger when the family founder has one child and face family succession problem, and when the founder has political connections and directly involves in firm’s management; while it is weakened by family founder’s social interpersonal trust with other entrepreneurs through their membership of Chambers of Commerce. Overall, we argue that family firms in China tend to hold high levels of cash for tunneling, which harms firm value, while the severe controlling-minority shareholder agency conflicts and unique Chinese family characteristics only make this situation worse.

This study examines the value of political capital in the Chinese IPO market. We find a positive relationship between a politically connected executive and the probability of IPO approval of entrepreneurial firms. We further identify that shareholders value those connections and give a market premium to connected firms after the firms go public. We provide evidence that other types of political capital gained through external sources, such as politically connected sponsors and PE investors, also bring benefits to the firms in their IPO approval, and these connections substitute for the effect of the executive's political connections on IPO approval. We argue that in emerging markets where government intervention is still prevalent, political capital does create value and entrepreneurial firms usually build political capital to facilitate their access to the IPO market, although other types of political capital do not bring further benefits into the post-IPO market.

Using a panel of Chinese firms over the period 2003–2013, we show that, from the supply-side perspective, as a result of the implementation of the economic stimulus package in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability, and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs.