Tunneling through related-party loan guarantees: evidence from a quasi-experiment in China

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21 Citations (Scopus)


We use the balance of outstanding related-party loan guarantees (RPLG) issued by Chinese listed firms as a direct measure of tunneling. By adopting institutional perspectives and a difference-in-differences approach, we show that firms increased RPLG after the 2008 enterprise income tax reform. More importantly, domestic firms had larger increases of RPLG compared to foreign-invested firms during the post-reform period. This treatment effect is in line with domestic firms’ higher exposures to weak corporate governance, inefficient banking system, and weak legal environment in China. Further analysis shows that the treatment effect is stronger for private controlled domestic firms than government controlled domestic firms. Finally, the propensity of tunneling also increased after the tax reform for all types of firms but the treatment effects on the propensity of tunneling are insignificant. Our findings are robust in models control for firm exposure to the global financial crisis of 2008–2009.

Original languageEnglish
Pages (from-to)857-884
Number of pages28
JournalReview of Quantitative Finance and Accounting
Issue number3
Publication statusPublished - 1 Oct 2016


  • China
  • Related-party
  • Tax
  • Tunneling

ASJC Scopus subject areas

  • Accounting
  • General Business,Management and Accounting
  • Finance


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