Abstract: With the continuous advancement of regional diversification, Chinese firms have established many subsidiaries. The increasing number of subsidiaries enhances the complexity of corporate operations and exacerbates the information asymmetry between minority shareholders and the firm, thereby leaving room for major shareholders to take advantage of control rights for their own benefits. This study investigates the mechanism by which the number of subsidiaries affects the tunneling activities of major shareholders, and reveals the negative corporate governance consequences resulting from the increasing number of subsidiaries. Based on a sample of Chinese listed firms from 2003 to 2022,and using firm fixed-effects models and instrumental variable regressions, the analysis concludes that a greater number of subsidiaries leads to more severe information asymmetry between minority shareholders and the firm, making it more difficult to monitor major shareholders, hence more significant tunneling by major shareholders. Further analysis indicates that firm digitalization can mitigate the impact of subsidiary network expansion on information asymmetry, thereby reducing the positive effect of the number of subsidiaries on major shareholders' tunneling activities. Conversely, the control rights of major shareholders can intensify the impact of information asymmetry on their tunneling activities, leading to a stronger positive effect of subsidiary numbers on tunneling by major shareholders. These conclusions contribute to a more comprehensive understanding of the corporate governance consequences associated with the number of subsidiaries and provide important insights for firms to plan their subsidiary network and mitigate the negative impacts resulting from subsidiary network expansion.

Key words: the number of subsidiary, large shareholders' tunneling, information asymmetry, digitalization, control right