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The impact of tunnelling on financial distress and resolution: Evidence from listed firms in China

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  • Yu He
  • Lei Xu
  • Minhua Yang

Abstract

We examine the impact of tunnelling on financial distress in Chinese stock markets, where the agency problem is common due to the weak legal system protecting minority shareholders' interests. Investigating the widespread financial distress among listed firms during the time period 1999–2015, we find that tunnelling is a determinant of financial distress–tunnelling not only leading to financial distress but also prohibiting distress recovery. Regulatory improvements aiming to reduce tunnelling behaviour contribute to the resolution of financial distress, but there is still room to improve. Our results show that state ownership has limited influence on firm operation before financial distress but tends to benefit recovery from periods of distress, which depicts the market economy mechanism in China. Our findings are robust to the potential endogeneity issue and various measures of financial distress.

Suggested Citation

  • Yu He & Lei Xu & Minhua Yang, 2021. "The impact of tunnelling on financial distress and resolution: Evidence from listed firms in China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 1773-1792, April.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:2:p:1773-1792
    DOI: 10.1002/ijfe.1877
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