Tunneling and Monitoring in Chinese Share Market

Abstract

There has been ample evidence suggesting that “tunneling” or expropriation of minority shareholders by the controlling shareholders has been a serious problem in the share market in China. This remains the case, despite the fact that the share division arrangement has been discontinued, and shares owned by different shareholders are now treated equally in share market (full circulation). Empirical studies suggest that improved legal protection of investors and enhanced regulation are efficient and essential measures to restrict tunneling. There are, however, few studies that have explored this topic theoretically. Aiming to fill this gap in the literature, this paper sets up a mixed-strategy game between the regulator (the China Securities Regulatory Commission (CSRC)) and a controlling shareholder of a representative company to analyze the strategies of both sides and investigate factors that may curb tunneling. Based on the model, recommendations on how to restrict expropriation of minority shareholders are presented. Results from this model provide theoretical support for empirical studies.