Ownership, Control Rights And Tunneling

Under concentrated-ownership structure, the common-shared control rights shift to controlling shareholders. The Private Benefit of Control (PBC) arising from control rights induces controlling shareholders to tunnel from listed companies, which is an expropriation of minority shareholders. The separation of control rights and ownership under pyramidal-controlled structure comes with a more intensive and frequent tunneling. The study analyzes tunneling from the aspect of ownership, control rights of the ultimate owners of entrepreneur-controlled companies.The study firstly develops a theoretical model by combining ownership, control rights, separation of ownership and control rights into LLSV's Model (2002) which focuses on analyzing the determinants of tunneling behaviors. Under the theoretical model, the study draws a primary conclusion that the lower the ownership of the ultimate owners, the higher control rights of the ultimate owners, the higher of the separation of ownership and control rights, the high the PBC is, and the ultimate owners have more incentives to tunnel.Then, the study makes an empirical analysis on the relationship between tunneling and ownership, control rights and separation of ownership and control rights. The study selects 453 entrepreneur-controlled samples from China's listed companies during 2001 to 2003. By using groups'comparison analysis, the study tests the correlation between ownership, control rights variables and tunneling variables. The major results are as follows:1. A statistically significant correlation exists between ownership proportion, the method to acquiring control rights, numbers of pyramidal layers, and income transferred transactions, guarantees and net receivables from ultimate owners. The ultimate owners are likely to tunnel more by using non-operating income-related transactions, guarantees and non-operating credits under a lower ownership proportion or acquiring control rights from buy-out, or a complicated pyramidal structure.2. The higher control proportion group is more likely to use credits to tunnel more compared with a lower control proportion group. On the contrary, the lower control group has a higher guarantees level.3. The ownership proportion, the method of acquiring control and the number of pyramidal layers are more effective in explaining the ultimate owners'decision between transferring incomes and sharing incomes with all shareholders. Under a lower ownership proportion or acquiring control from buy-out or a more pyramidal layers circumstance, the ultimate owners are more likely to share cash dividend with all shareholders. Under the contrary circumstance, they make more income-transferring transactions to tunnel more.The expected contribution of this study is to explain the tunneling behaviors from ownership, control and separation of ownership and control aspects which are helpful in disclosing the fundamental incentive of tunneling.