Expropriation, Weak Corporate Governance and Post-IPO Performance: Chinese Evidence

Peng Cheng, Jean Jinghan Chen and Xinrong Xiao

A chapter in Issues in Corporate Governance and Finance, 2007, pp 237-267 from Emerald Group Publishing Limited

Abstract: This study provides evidence that Chinese initial public offerings (IPOs) report better operating performance than industry peers in the pre-IPO period, and worse performance in post-IPO period compared to the pre-IPO level. We find that related party transactions (RPTs) with controlling shareholders have significant effects on the long-run performance of IPO firms. Controlling shareholders structure a large percentage of operating (non-loan) RPTs to artificially boost revenues and/or profits of their IPO subsidiaries in the pre-IPO period. However, in the post-IPO period, controlling shareholders discontinue this RPT-based earnings manipulation practice and begin to expropriate IPO subsidiaries by obtaining a large percentage of cash loans, primarily in return for profits and/or resources transferred into the IPO subsidiaries in the pre-IPO period. Finally, we find that state-controlled IPO firms with a highly concentrated ownership structure and a less independent board of directors are more likely to be expropriated by controlling shareholders in the post-IPO period through related loans.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afeczz:s1569-3732(07)12010-7

DOI: 10.1016/S1569-3732(07)12010-7

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