Corporate governance and tunneling: Empirical evidence from China

Lei Gao, Gerhard Kling

Research output: Contribution to journalArticlepeer-review

123 Citations (Scopus)


We analyze asset appropriation by principal shareholders in China and uncover the following relationships: (1) outsiders in the board of directors, audit without non-clean opinion, and dispersed ownership prevent operational tunneling; (2) belonging to a business group and issuing B or H share exacerbate asset appropriation. Institutional ownership does not prevent the embezzlement of assets and is endogenous, as investors select companies with good governance. Besides governance mechanisms, stock characteristics matter in that larger firms exhibit less tunneling, whereas highly leveraged firms experience the opposite. We find a decline of tunneling in 2001, which might be due to economic reforms.
Original languageEnglish
Pages (from-to)591-605
Number of pages15
JournalPacific-Basin Finance Journal
Issue number5
Early online date17 Nov 2007
Publication statusPublished - Nov 2008


  • Corporate governance
  • China
  • Operational tunneling


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