Privatization, tunneling, and tax avoidance in Chinese SOEs

Purpose The purpose of this paper is to investigate the effect of ownership structure arising from China’s unique privatization process on listed firms’ tunneling activities and their interaction with tax avoidance. Design/methodology/approach Using hand-collected data on the incompletely restructured state-owned listed firms and their applicable tax rate, this paper conducts a multivariate regression to test research questions. It also employs a triple differences method to examine whether the observed interaction between tax avoidance and tunneling is mitigated for well-governed firms. Findings It documents that controlling shareholders’ tunneling increases as the percentage of shares owned by state-owned enterprises (SOEs) increases. Evidence also shows that the magnitude of tunneling increases when SOEs controlled by the central government engage in more tax avoidance, suggesting that these firms use tax avoidance to facilitate wealth expropriation. Social implications These findings advance the understanding of the tunneling incentive behind the tax avoidance behavior for a subset of Chinese SOEs and have implications for emerging capital markets that are characterized by concentrated government ownership and weak corporate governance. Originality/value This paper is the first paper to investigate the effect of the incomplete privatization process on tunneling and the interaction between tunneling and tax avoidance activities. It extends prior studies by investigating the incentives behind SOEs’ tax avoidance from the perspective of an agency problem and documenting that good corporate governance plays an important role in deterring the diversionary tax avoidance.

Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992–2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PE-backed companies are, on average, 70 basis points lower, holding other things constant. We also find that PE-backed companies have more conservative investment and dividend policies after bond offerings compared with non-PE-backed companies. These results suggest that PE firms’ reputational concerns dominate their wealth expropriation incentives and help their portfolio companies reduce the costs of debt.

Family Involvement and Dividend Policy in Closely Held Firms

This article examines the effects of family involvement on dividend policy in closely held firms that face agency problems involving majority–minority shareholders. We argue that minority shareholders press for dividends when they perceive situations fostering wealth expropriation. Looking at 458 Colombian companies, we find that family involvement in management does not affect dividend policy; family involvement in both ownership and control through pyramids affects dividend policy negatively; and family involvement in control through disproportionate board representation affects dividend policy positively. Thus, family influence on agency problems, and hence on dividend policy as a mitigating mechanism, varies depending on family involvement.

Debt Analysts' Views of Debt-Equity Conflicts of Interest

ABSTRACT We investigate how the tone of sell-side debt analysts' discussions about debt-equity conflict events affects the informativeness of debt analysts' reports in debt markets. Conflict events such as mergers and acquisitions, debt issuance, share repurchases, or dividend payments potentially generate asset substitution or wealth expropriation by equity holders. We document that debt analysts routinely discuss these conflict events in their reports. More importantly, discussions about conflict events that we code as negative are associated with increases in credit spreads and bond trading volume. Consistent with the informational value of debt analysts' discussions in secondary debt markets, we find that negatively coded conflict discussions predict higher bond offering yields in the primary bond market. In additional analyses, we measure the tone of debt analysts' discussions based on their disagreement with the tone of equity analysts' discussions and find that the informativeness of debt analysts' reports is higher when our coding indicates that conflict events are viewed negatively by debt analysts but positively by equity analysts. JEL Classifications: G12, G14, G32, M49.

Family Firms and Institutional Investors

It is generally assumed that family firms emphasize socioemotional wealth, which exacerbates wealth expropriation from noncontrolling shareholders. We examine this issue in the context of nonfamily shareholders, specifically institutional investors, and find that institutional investors avoid investments in family firms. Furthermore, integrating institutional theory with a socioemotional wealth approach, we find that financial regulation can mitigate external investors’ concerns. These two results are important theoretically because they provide insight into the effect of agency problems specific to family firms and are important for management practice because they can provide guidance for family firms interested in new sources of capital.

Inflation risk, wealth expropriation and governance implications

With its often unperceived impact, interest rates and inflation volatility strongly affect long term stability within the firm, surreptitiously reshaping equilibria among different stakeholders and so raising key corporate governance concerns. Whereas the impact of interest rates and inflation on capital budgeting issues had been extensively analyzed, little attention has been paid to corporate governance implications, concerning key issues such as “optimal” (indexed) contracting, effective corporate ownership (messed up by wealth expropriation and redistribution), asset substitution or information asymmetries (embedded in hidden impacts on interest/inflation sensitive assets and liabilities). The topic is so theoretically and practically captivating, filling a gap in the existing literature and addressing real value protection targets, unassumingly crucial even for corporate ownership and control issues.

Bondholder wealth effects from dividend changes

Bhagat and Romano (2002a, 2002b) document the importance of event study analysis of equity returns in corporate governance. We extend their analysis with the argument that analysis of bond returns around important corporate events can provide additional important information. Such information is particularly important in the current active public discussions over corporate governance. We provide an example of event study analysis of bond returns examining the impact of large dividend changes on both stockholders and bondholders in an effort to differentiate between the information content (transparency) and possible wealth transfers (theft) around dividends. Our study replicates earlier studies on investment grade bonds with ambiguous results using a sample of noninvestment grade bonds. Our results suggest that for ordinary dividend changes, wealth expropriation is a significant explanation in the gain to stockholders.