Can Internal Governance Mechanisms Prevent Asset Appropriation? Examination of Type I Tunneling in China

Can Internal Governance Mechanisms Prevent Asset Appropriation? Examination of Type I Tunneling in China

Yuan George Shan University of Adelaide – Business School

May 2013
Corporate Governance: An International Review, Vol. 21, Issue 3, pp. 225-241, 2013

Manuscript Type. Empirical. Research Question/Issue. Direct transfer (Type I tunneling) means that the controlling shareholders transfer resources from the firm for their own benefit. This study aims to investigate the impact of internal and external governance mechanisms from the perspective of principal‐principal (P‐P) conflicts on Type I tunneling. Research Findings/Insights. Using hand‐collected data comprising 117 Chinese listed companies with 540 firm‐year observations during 2001–2005, the results show that state ownership and the number of board of directors’ meetings are positively correlated with Type I tunneling, whereas the number of independent directors reveals a negative association. Other internal governance mechanisms including foreign ownership, the size of the board of directors, supervisory board size, number of professional supervisors, and the number of supervisory board meetings were found to have no impact. Theoretical/Academic Implications. Several implications can be drawn. First, this study has modeled tunneling using a well‐accepted theoretical perspective – agency theory of P‐P conflicts. But the results show that agency theory does not appropriately explain tunneling behavior in China and so institutional theory is suggested as an alternative theoretical perspective for future research. Second, corporate governance reforms relating to supervisory boards have not been sufficient to ensure that they properly fulfill their role of oversight. Rather, such supervisory boards are perhaps playing more of a “rubber stamp” role. Practitioner/Policy Implications. This study recommends prescribing the legal responsibilities and obligations for two‐tier boards in the Chinese context, allowing them to undertake their duties diligently.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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