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Does stock liquidity affect expropriation behavior by controlling shareholders? Evidence from China

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  • Xiang, Xin

Abstract

When a firm is controlled by a large shareholder, the principal agency problem arises from expropriation by controlling shareholders of other shareholders. Using a sample of 3776 publicly traded firms in the Chinese A-share market over the period 2007–2020, this study investigates whether stock liquidity impedes or enhances the expropriation behavior of controlling shareholders. I demonstrate that (1) a liquid stock market generally encourages expropriation behavior by controlling shareholders, (2) the positive effect of stock liquidity on expropriation by controlling shareholders is mitigated when active investors hold a large stake in the firm, and (3) active investors’ monitoring of expropriation by controlling shareholders is mitigated at state-owned enterprises and firms that have a large gap between ownership and control. However, higher competition among blockholders strengthens the discipline of active investors with respect to expropriation. This study builds a new link between a market factor (stock liquidity) and a governance problem (expropriation by controlling shareholders) and reveals some new characteristics in the relationship between stock liquidity and corporate governance in an emerging market.

Suggested Citation

  • Xiang, Xin, 2024. "Does stock liquidity affect expropriation behavior by controlling shareholders? Evidence from China," Economic Systems, Elsevier, vol. 48(2).
    • Handle: RePEc:eee:ecosys:v:48:y:2024:i:2:s0939362524000396
    DOI: 10.1016/j.ecosys.2024.101217
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    More about this item

    Keywords

    Active investors; controlling shareholders’ expropriation; corporate governance; stock liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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