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Mutual funds, tunneling and firm performance: evidence from China

Amon Chizema (), Wei Jiang (), Jing-Ming Kuo () and Xiaoqi Song ()
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Amon Chizema: University of Birmingham
Wei Jiang: University of Manchester
Jing-Ming Kuo: University of Birmingham
Xiaoqi Song: National Equities Exchange and Quotations

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 1, No 12, 355-387

Abstract: Abstract In contrast to US companies, Chinese firms have concentrated ownership with the effect that the central agency problem emanates from controlling shareholders expropriating minority shareholders, a phenomenon referred to as ‘tunneling’. This study examines the monitoring effect of mutual funds on the tunneling behavior of controlling shareholders. Due to the distinctive institutional settings in China, including a high level of ownership concentration, underdeveloped legal system in the stock markets and weak governance mechanisms in the mutual fund industry, we find that an increase in mutual fund ownership effectively mitigates the tunneling behavior of controlling shareholders thus improving firm performance. Nonetheless, after the mutual fund ownership reaches a certain threshold, an increase in concentrated mutual fund ownership is associated with heavier tunneling and lower firm performance. This may suggest that concentrated mutual funds collude with controlling shareholders in order to preserve their private interests. Moreover, the above effects are found to be more pronounced for firms with heavier tunneling activities. Our finding of the non-monotonic monitoring role of mutual funds brings attention to the private interest theory for mutual funds, an aspect that has been largely ignored in previous studies on mutual funds.

Keywords: Mutual funds; Corporate governance; Tunneling; Firm performance; Nonlinearity; Ownership concentration (search for similar items in EconPapers)
JEL-codes: G15 G18 G23 G32 G34 G38 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00846-z

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