This study investigates how controlling shareholders fraudulently extracted firm value via cash tunnelling from Chinese companies from 1998 to 2011. The evidence suggests that expropriating owners choose a balance sheet account that is not directly related to the firm’s operating business in order to record a fictitious asset, with the account remaining in the company’s books for a reasonably long time. The delay in recognising the fictitious asset as a loss in the financial statements makes it more difficult for auditors to detect the fraud. We develop two measures to estimate the total loss caused by the cash tunnelling, and estimate the loss to be two to four times net income. Evidence on the factors and process surrounding cash tunnelling is presented, and we demonstrate that the propensity to engage in tunnelling is positively related to the differential rights between controlling shareholders and minority shareholders and negatively related to firm profitability, the probability of fraud detection and the severity of the punishment.
http://fmaconferences.org/Vegas/VegasProgram.htm, 2016, (Session 260), pp. 1 - 64 (64)