The effectiveness of public enforcement: evidence from the resolution of tunneling in China

Lars Helge Hass, Sofia Johan, Maximilian Müller

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This paper examines the effectiveness of public enforcement by studying the effects of regulatory intervention to curb tunneling through intercorporate loans in China. Specifically, we explore whether public enforcement efforts in 2006 (blacklisting and sanctions) resulted in less tunneling, and ultimately in increased performance for tunneling firms. We show that tunneling is among the dominant factors increasing the likelihood of becoming blacklisted. We also find that firms' tunneling mechanisms decreased significantly after the regulatory shock, and that their performance increased significantly compared to non-tunneling firms after the regulatory shock. Finally, we find a positive market reaction to the public announcement of tunneling both for firms that have been blacklisted and other tunneling firms that are not blacklisted. Collectively, these results suggest that public enforcement in the presence of a credible threat succeeds in deterring the effect on tunneling behavior in China.
Original languageEnglish
Pages (from-to)649-668
Number of pages20
JournalJournal of Business Ethics
Volume134
Issue number4
DOIs
Publication statusPublished - 26 Sep 2014

Keywords

  • corporate governance
  • tunneling
  • enforcement
  • China

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