Previous studies show that in contrast to evidence that share issue privatization (SIP) in most other countries have improved firm profitability, China’s SIP of the 1990s had no such effect. We argue that the main reason for the failure of China’s SIP is likely to have been the weak institutional environment in place at that time. We examine China’s SIP in a more recent period in which the institutional environment was greatly improved. Using a matching sample method, we find that SIP firms continued to experience negative post-SIP profitability changes in our sample period. However, their performance decline was significantly less than that of their matched non-SIP SOEs. We also find that the introduction of the independent director rule helped to improve firm performance. Our results reconcile the findings of the SIP effect in China with international evidence and illustrate the importance of a developed capital market to ensuring the success of privatization schemes.

In this paper, we investigate the problem of controlling shareholder Non-Operational Fund Occupancy (NOFO) in China, where controlling shareholders directly take funds away from listed firms without matching business transactions. The NOFO problem was an evident and widely used tunneling activity in China and was identified by the securities market regulators. Unlike previous literature that used indirect measures of tunneling, we directly collect the actual amounts of NOFO from mandated disclosures and utilize this direct measure of tunneling in a series of empirical tests. First, we examine and find that various mechanisms such as ownership structure, corporate governance and institutional environments could restrain tunneling activities. Second, we find significantly positive market reactions to regulations that aimed to solve the NOFO problem. Third, we find evidence that the operating performance and valuation of firms with a NOFO problem improved after the regulations went into effect. Our study sheds light on the severe issue of minority shareholder expropriation and the effectiveness of regulators' policy to remedy the tunneling problem.

This study investigates a particularly brazen form of corporate abuse, in which controlling shareholders use intercorporate loans to siphon billions of RMB from hundreds of Chinese listed companies during the 1996–2006 period. We document the nature and extent of these transactions, evaluate their economic consequences, examine factors that affect their cross-sectional severity, and report on the mitigating roles of auditors, institutional investors, and regulators. Collectively, our findings shed light on the severity of the minority shareholder expropriation problem in China, as well as the relative efficacy of various legal and extra-legal governance mechanisms in that country.