Public governance and tunneling: evidence from a quasi-experiment in China

Abstract

This study aims to take advantage of the unprecedented anti-corruption campaign launched in China in December 2012 and examine the effect of improved public governance on tunneling. This study uses a sample of Shanghai and Shenzhen Stock Exchange listed companies from 2010 to 2014 and conduct regression analyses to investigate the effect of improved public governance attributed to the anti-corruption campaign on tunneling. This study finds that the level of tunneling decreased significantly after the anti-corruption campaign, suggesting that increased public governance effectively curbs tunneling. Cross-sectional results show that this mitigating effect is more pronounced for non-SOE firms, especially non-SOE firms with political connections, firms audited by non-Big 8 auditors, firms with a large divergence between control rights and cash flow rights and firms located in areas with lower marketization. This study highlights the importance of anti-corruption initiatives in improving public governance and in turn reducing tunneling. This study provides important implications for many other emerging economies to improve public governance. This study contributes to the literature on the role of public governance in constraining corporate agency problems and advances the understanding of the economic consequences of China's anti-corruption campaign in the context of tunneling.

Keywords

• anti-corruption
• public governance
• tunneling