The Effect of Litigation on Tunneling of Debt

Abstract

Abstract:

It is one of vital issues on rule of law to study the effect of law on investor protection. Tunneling of firm by large shareholder can not only cause damage to the minority shareholders, but impair thevalue of creditors. Increasing rise of other receivables in firm will intensify agency conflict between shareholder and creditors. To regulate the behavior of large shareholder, creditors will fall back on the law as outside governance that lessens the conflict between shareholder and creditors, which can protect creditor`s rights. Based on the hand collected debt lawsuits from 1998-2007 in China, the results show that occurrence of litigation keep positive correlation with degree of tunneling via internal corporate loan, and the relationship get strongly when there are less leverage in firm. Since second year after litigation against firm, degree of tunnel from large shareholder get less, which verifies the effect of litigation on the creditor protection, and of the law as outside governance on controlling shareholder behavior.

Key words: tunneling debt, litigation, creditor protection

Wang Yanchao, Jiang Guohua. The Effect of Litigation on Tunneling of Debt[J]. , 2016, 28(1): 191-204.

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