Tunneling and Propping through Related Party Transactions in Pakistani Family Business Groups
Keywords:
Tunneling, Propping, family business groups, corporate governance, related party transaction, family ownership, ownership structure, business group.Abstract
The aim of this study is to analyze the agency issues like tunneling and propping while examining the impact of Related Party Transactions (RPTs) in firms with respect to family business groups of Pakistan.This study used a sample of 326 non-financial firms listed on Pakistan Stock Exchange in the period from 2008 to 2013 by examination of over four thousand five hundred RPTs. For data analysis, panel regression models with both firm and year fixed effects as well as logit model are applied.The findings depict that controlling shareholder in firms affiliated with family business groups mostly tunnel resources through cash payments and trade of goods & services and prop up resources through cash receipts transactions. The study also finds that tunneling related transactions are more significant in firms that have larger size, market value and other receivables balances. Whereas, propping related transactions are dominant in highly leveraged firms with lower return on assets.This study is limited to Pakistani nonfinancial sector. The results implied that interests of minority shareholders are considerably affected by the hidden operations of the majority shareholders in family business group firms. The minority shareholders need to be more cognizant of the family business group firms’ ownership structures, board members, directors’ shareholding and related party transactions.This study provides new insights on ‘propping’ besides ‘tunneling’ in Pakistani family-owned companies, which has received little attention in the context of emerging economies, and Pakistan.
References
Afgan, N., Gugler, K., & Kunst, R.M. (2017). Corporate Governance and Returns on Investments of Pakistani Listed Companies. Advances in Economics and Business 5(4), 190-199.
Aharony, J., Wang, J., & Yuan, H. (2010). Tunneling as an Incentive for Earnings Management during the IPO Process in China. Journal of Accounting and Public Policy, 29 (1), 1-26.
Atanasov, V. (2005). How much value can block holders tunnel? Evidence from the Bulgarian mass privatization auctions. Journal of Financial Economics,76(1), 191-234.
Li, S., & Chen, C.X. (2017). How much control causes tunneling? Evidence from China. China Journal of Accounting Research, 10(3), 231–245.
Cheung, Y., Jing, L., Lu, T., Rau, P.R., &Stouraitis, A. (2009). Tunneling and propping up: An analysis of related party transactions by Chinese listed companies. Pacific-Basin Finance Journal,17(3), 372–393.
Cheung, Y., Rau, P., &Stouraitis, A. (2006). Tunneling, propping and expropriation: Evidence from connected party transactions in Hong Kong. Journal of Financial Economics, 82(2), 343–386.
Cho, S., & Lim, K.M. (2018). Tunneling by Related‐party Transactions: Evidence from Korean Conglomerates, Asian Economic Journal, 32(2), 147-164
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The law and economics of self-dealing. Journal of Financial Economics,88(3), 430–465.
Du, J., He, Q., & Yuen, S.W. (2013). Tunneling and the decision to go private: Evidence from Hong Kong. Pacific Basin Finance Journal, 22(1), 50-68.
Dyck, A., & Zingales, L. (2004). Private benefits of control: an international comparison.
Journal of Finance,59(2), 537–600.
Friedman, E., Johnson, S., & Mitton, T. (2003). Propping and tunneling. Journal of Comparative Economics, 31(4), 732–750.
Hussain, S. (2020). Pyramidal Ownership Structure and Cash Flow Wedge: Evidence from Family Business Groups of Pakistan. International Journal of Management Research and Emerging Sciences, 10(4), 86-103.
Hussain, S., & Safdar, N. (2018). Tunneling: Evidence from Family Business Groups of Pakistan. Business & Economics Review, 10(2), 97-122.
Javid, A.Y., & Iqbal, R. (2010). Corporate governance in Pakistan: Corporate valuation, ownership and financing.Working Paper Series No. 57, Pakistan Institute of Development Economics, Islamabad.
Jensen, M.C., &Meckling, W.H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Jian, M., & Wong, T.J. (2003). Earnings management and tunneling through related party transactions: Evidence from Chinese corporate groups. Hong Kong University of Science and Technolog, Working paper.
Jian, M., & Wong, T.J. (2010). Propping through related party transactions. Review of Accounting Studies, 15(1), 70-105.
Jiang, G., Lee, C.M.C., & Yue, H. (2010). Tunneling through inter corporate loans: The China experience. Journal of Financial Economics,98(1), 1–20.
Jiang, G., Rao, P., & Yue, H. (2014). Tunneling through non-operational fund occupancy: An investigation based on officially identified activities. Journal of Corporate Finance, 32(C), 295-311.
Johnson, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. American Economic Review,90(2), 22–27.
Kim, B., Pae, J., &Yoo, C-Y. (2019). Business Groups and Tunneling: Evidence from Corporate Charitable Contributions by Korean Companies. Journal of Business Ethics, 154(3), 643- 666.
La Porta, R., Lopez-de-Silanes, F. & Shleifer, A. (2000). Investor protection and corporate governance. Journal of Financial Economics,58(1-2), 3–27.
La Porta, R., Lopez-de-Silanes, F., &Zamarripa, G. (2003). Related lending. Quarterly Journal of Economics, 118 (1), 231–268.
Lemmon, Michael, L., &Lins, K.V. (2003). Ownership structure, corporate governance, and firm value: Evidence from the East Asian financial crisis. Journal of Finance, 58(4), 1445– 1468.
Liew, C.Y., & Alcan, E., & Devi, S.S. (2015). Independent Directors Tenure, Related Party Transactions, Expropriation and Firm Value: Evidence from Malaysian Firms. SSRN Electronic Journal. 10.2139/ssrn.2671415.
Nekhili, M., &Cherif, M. (2011). Related parties transactions and firm’s market value: The French case. Review of Accounting and Finance, 10(3), 291-315.
Nenova, T. (2003). The value of corporate voting rights and control: a cross-country analysis. Journal of Financial Economics, 68(3), 325-351.
Nurazi, R., Santi, F., & Usman, B. (2015). Tunneling: evidence from Indonesia stock exchange.
Asian Academy of Management Journal of Accounting and Finance, 11 (2),127-150.
Peng, Q., John, K.C., & Yang, Z. (2011). Tunneling or propping: Evidence from connected transactions in China. Journal of Corporate Finance,17(2), 306–325.
Ying, Q., & Wang, L. (2013). Propping by controlling shareholders, wealth transfer and firm performance: Evidence from Chinese listed companies. China Journal of Accounting Research, 6(2), 133-147.
Young, M., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1), 196–220.
Zhang, X., Yang, X., Strange, R., & Zhang, Q. (2017). Informed trading by foreign institutional investors as a constraint on tunneling: Evidence from China. Corporate Governance International Review, 25 (4), 222–235.
Downloads
Published
How to Cite
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
You are free to:
- Share — copy and redistribute the material in any medium or format for any purpose, even commercially.
- Adapt — remix, transform, and build upon the material for any purpose, even commercially.
- The licensor cannot revoke these freedoms as long as you follow the license terms.
Under the following terms:
- Attribution — You must give appropriate credit , provide a link to the license, and indicate if changes were made . You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
- No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.
Notices:
You do not have to comply with the license for elements of the material in the public domain or where your use is permitted by an applicable exception or limitation .
No warranties are given. The license may not give you all of the permissions necessary for your intended use. For example, other rights such as publicity, privacy, or moral rights may limit how you use the material.
