Expropriation through connected party transaction : the case of Hong Kong

This dissertation investigates if the pricing of connected transactions is influenced by tunneling purpose to benefit controlling shareholders at the cost of minority shareholders. I additionally check out if the pricing decision is influenced by specific corporate governance and information disclosure characteristics. The research investigates two kinds of connected transactions, connected party acquisition and connected party sales, in Hong Kong from the entire year 1998 to 2000. The examples of connected transactions include 51 connected party transactions and 78 connected party acquisitions. For comparison, the examples of arm’s length transactions are constructed, containing 63 asset sales and 62 asset acquisition. The empirical results claim that the pricing decision of connected transactions is suffering from the tunneling incentives of controlling shareholders. In contrast to firms conducting arms’ length transactions, I discover that the firms sell assets at discounted for their connected parties, and they acquire assets at higher price from their connected parties. These results support the tunneling view that the substantial discretionary power held by controlling shareholders allows them to expropriate firm wealth at the cost of minority shareholders. In Hong Kong, I actually did not find systematic evidence that strong corporate governance mechanisms are likely involved in eliminating connected transactions. There was limited evidence that fuller information disclosure helps in curbing tunneling behaviors of controlling shareholder through connected transactions…

Contents: Connected Party Transaction in Hong Kong

Chapter 1 Introduction
1.1 Research Purpose
1.2 Structure of the study
Chapter 2 Literature Review
2.1 Introduction
2.2 How Controlling Shareholders Expropriate from Minority Shareholders
2.3 Magnitude of Expropriation of Minority Shareholders
2.4 Literature on Connected Party Transaction
2.5 Summary
Chapter 3 Hypothesis, Methodology and Data
3.1 Hypothesis Development
3.2 Methodology
3.3 Data and Variables
Chapter 4 Empirical Results
4.1 Do controlling shareholders price connected transactions to their own interests?
4.2 Effect of corporate governance and information disclosure
Chapter 5 Robust Test
5.1 Alternative Industry Classification…

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