Corporate Ownership, Debt, and Expropriation: Evidence from China

Abstract

We provide direct evidence on the dark side of leverage and offer new insights regarding the role of debt in corporate governance. Using a sample of Chinese state-owned enterprises that have experienced a transfer of controlling rights, we find a positive and significant relationship between expropriation and debt usage. Firms controlled by private block shareholders tend to have higher leverage due to excessive expropriation via debt. The evidence we document provides fresh insights into the impact of debt on the agency problem between the controlling shareholder and minority shareholders, and suggests the presence of expropriation through debt and its conditional effect on corporate ownership.