Governance Structure and Related Party Loan Guarantees: The Case of Chinese Family Business Groups

Chen, Xin; Arnoldi, Jakob; Na, Chaohong

doi:10.1017/mor.2015.22

Cited by 14 publications

(18 citation statements)

References 60 publications

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“…In the case of China, related studies find evidence in both directions. Arnoldi et al (2013) show that vertically interlocked chairmen could improve firm value by enhancing return on assets of listed firms, whereas Chen et al (2015) find a positive relationship between vertical interlock and loan guarantees to related parties of controlling families, implying that vertical interlock facilitates tunnelling behaviours by controlling family business groups. In addition, Opie et al (2019) show a positive association between pyramidal layers and investment efficiency, but if the government tightens control through vertical interlock of chairman, the benefits will be largely offset, which suggests an unfavourable effect of vertical interlock.…”

Section: Introductionmentioning

confidence: 99%

Vertical interlock and the value of cash holdings

Chen

Yang

2019

Accounting & Finance

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We test whether vertical interlock endangers cash resources that manifests in a lower value of cash in listed companies affiliated with business groups. Using a sample of 9,032 observations from 2007 to 2016 in the Chinese market, we find that investors tend to value cash holdings in companies with vertical interlock substantially less than in those without. The marginal effect of vertical interlock on the value of cash remains significantly negative after controlling for existing governance mechanisms, accounting conservatism and internal control quality, shedding light on agency problems between majority shareholders and minority shareholders within business groups of emerging markets.

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Section: Introductionmentioning

confidence: 99%

Vertical interlock and the value of cash holdings

Chen

Yang

2019

Accounting & Finance

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“…Vertical interlocks may however also, secondly, afford the affiliated firm protection against tunneling by the apex firm as the representation that the affiliated firm gains in the apex firm can be used to influence decisions to tunnel or deter the apex firm from attempting to tunnel. Supporting this, one of the few existing studies of vertical interlocks finds that vertical interlocks reduce the volume of loan guarantees issues (which are another often used vehicle for tunneling) by a listed affiliated firm to other group-affiliated firms (Chen et al, 2015). No matter which of the two explanations is the dominant in a specific case, the bottom line is that we can expect interlocks to become more predominant in situations where tunneling is likely.…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 91%

“…In addition, Ma and DeDeo (2016) find interlocks in the Chinese non-profit sector that also have a hierarchical nature and involve government control. Moving beyond state-owned firms and government control, Chen, Arnoldi, and Na (2015) find that interlocks afford listed firms, affiliated with family-owned business groups, protection against expropriation through loan guarantees. This indicates that interlocks can also be a resource for the affiliated firm and not just be a control mechanism for the apex firm.…”

Section: Theoretical Background and Hypothesesmentioning

confidence: 99%

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Multi-Level State Capitalism: Chinese State-Owned Buisness Groups

et al. 2018

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We argue that vertical interlocks in Chinese state-owned business groups are important mechanisms for coordination and information exchange between the apex firm and affiliated firms, and that they are also mechanisms for government owners of the business groups to exercise control. By combining resource dependence theory with elements from transaction cost economics and agency theory, we propose that the need for interlocks increases the higher the level of government ownership. The central government is therefore more likely to use vertical interlocks than the provincial governments, which again are more likely to use vertical interlocks than the municipal governments. We develop three hypotheses based on these arguments. A regression analysis of a hand-collected data set finds strong support for our hypotheses. Our results shed light on coordination and governance issues within the state-owned sector in China and on an important means for mitigating these issues used by the government owners and firms affiliated with state-owned groups.

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“…Two were rejected after the second round of review, leaving three to be put through several more rounds of review before they were accepted. Chen, Arnoldi, and Na (2015) examined intrafamily business group loan guarantees in China. Nonfamily minority shareholder wealth may be expropriated by the controlling families through loans or loan guarantees by family business group listed affiliates (LAF) to other firms within a business group.…”

Section: The Articles In This Special Issuementioning

confidence: 99%

Research on Chinese Family Businesses: Perspectives

Li¹,

Ling

Chua

et al. 2015

Manag. Organ. Rev.

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This introduction traces the disappearance of Chinese family businesses from 1949 to 1978, their revival since then, and their future challenges. It then summarizes the three papers included in this Special Issue and proposes an agenda for family business studies in China. The article first focuses on the nonmarket social and political network strategies that these family-centered business organizations have had to adopt in order to overcome the difficulties they faced in accessing opportunities and resources as a result of Chinese culture's traditional low esteem for merchants and the government's continuing preference for a state-dominated economy. Family firms have so far been able to grow disproportionately rapidly in China's economy because, by leveraging the shared interests and dedication of immediate and extended family members, they have been able to achieve lower cost and higher efficiency, respond quickly to market changes, and expand social and political networks. These nonmarket strategies, however, also have a dark side. Furthermore, as the liberalization of China's economy deepens, competition must rely critically on market strategies such as innovation, alliances, and internationalization. The proposed research agenda addresses these future challenges as well as some research questions unique to Chinese family businesses.

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Governance Structure and Related Party Loan Guarantees: The Case of Chinese Family Business Groups

Cited by 14 publications

References 60 publications

Vertical interlock and the value of cash holdings

Vertical interlock and the value of cash holdings

Multi-Level State Capitalism: Chinese State-Owned Buisness Groups

Research on Chinese Family Businesses: Perspectives

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