Bidirectional capital impropriation and capital investment of listed companies

Song Zhu, Chao Chen and Yuan Ma

Nankai Business Review International, 2010, vol. 1, issue 3, 254-272

Abstract: Purpose - In recent decades, related party transactions have been assailed by scholars and regulation authorities since related parties of a listed company may “tunnel” its resources, damaging the interests of other stakeholders. One kind of “tunneling” is capital impropriation, which is common but harmful in an emerging market where investor protection is weak. In contrast, a listed company may also impropriate capitals from its controlling business group or related parties reported as accrued liabilities in the financial statement of the listed company, which can be regarded as the “supporting hand” from related parties. Thus, the capital impropriation may be bidirectional. In fact, the capital impropriation is a financing behavior with low cost, and it can provide necessary working capital for some firms and reduce that for the other. Since the working capital is an important part of the firm's stock of capital, which can relax firms' short‐run financing constraints, it may significantly influence firms' capital investment behaviors. Therefore, how does the bilateral capital impropriation influences the capital investment of listed firms? Design/methodology/approach - Using the data of Chinese listed firms in 2005 and 2006, this paper empirically investigates the effect of bidirectional capital impropriation on listed firms' capital investment efficiency. Findings - Receivable items like accounting receivable or other accruals that related parties owe to the listed firms will reduce the capital expenditure of listed companies and reduce the sensitivity of investment‐cash flow relation. Actually, capital impropriation by listed firms may stimulate their capital investments and increase the sensitivity of investment‐cash since listed firms obtain capitals for future investments at a lower cost. In all, the bidirectional capital impropriation significantly affects the capital investment and sensitivity of investment‐cash flow of listed firms, and different direction of capital impropriation will lead to different investment efficiency. It should also be noted that capital impropriation is not necessarily something negative since it may sometimes reduce the overinvestment. Originality/value - The paper provides more evidence to the capital investment of listed companies and identifies the factors influencing its efficiency from the perspective of bidirectional capital impropriation.

Keywords: Capital gains; Investments; Financial markets; Fraud (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eme:nbripp:v:1:y:2010:i:3:p:254-272

DOI: 10.1108/20408741011069197

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