In 2005, China carried out a major reform that allows the previously untradeable shares controlled by large shareholders to become tradable in the secondary market. This reform and subsequent dramatic change of behavior of controlling shareholders, offer researchers a unique opportunity to study the behavior of controlling shareholders and its implication for corporate governance. Asset injection, by which controlling shareholders sell their high quality assets to the listed companies they controlled, became instantly popular after the reform. The purpose of this paper is to provide strong evidence that such asset injection improves both the Tobin's Q and the composite financial performance score of the injected firm.
Due to the availability of sample data, this paper focuses on two major types of assets injection: the listed companies purchase the large shareholders' physical assets or equity assets (their shares of other companies) in cash; and the listed companies purchase the large shareholders' physical assets or equity assets through private stock offering, often increasing the share proportion of large shareholders.
The research findings suggest that this full listing reform aligned the interest of controlling shareholders with the company and that controlling shareholders change their behavior from tunneling to propping.
The contributions of this paper are threefold: First, the paper provides strong evidence of large shareholders' propping behavior. Second, the authors use long‐term corporate financial performance measures to study the impact of asset injection. Third, the authors investigate what types of injections will have a bigger impact on financial performance of the injected firms.
