This article investigates tunneling by controlling shareholders in China's public companies, and finds that, first, tunneling is pervasive and severe; second, private controlling ownership significantly increases the severity of tunneling; third, tunneling has significant negative impact on corporate financial performance. Our finding that private-controlled public companies have higher risk of tunneling suggests that, while privatization in China may have improved corporate operation, tunneling by private controlling shareholders has more than offset the operational gains from privatization.
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