Tunneling, overlapping owner and investor protection: Evidence from merger and acquisition in Asia
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Based on median values of overlapping owners, the sample was splitted into high and low overlap ownership and the analysis was performed for both samples. The median value of overlapping owners was 2.6. The high
overlap owners’ category consists of deal MA that had total overlap owners between 3.00 - 92.97, while the low overlap owners category consists of total overlap owners between 0.01 -2.00.
As expected with the hypotheses objectives, in the high overlap owners sample, total overlap owners are positively related to announced deal value with the coefficient of 70.089 and significant at 1 level. Investor
protection and CG bidder were negatively related to the announced deal value, but the effect is not significant. Surprisingly, however, for the low overlap owner sample the coefficient of the total overlap owners variable are
negatively and insignificantly related to deal value, with coefficient of -24,295 and not significant. Overall results suggest that overlap owners have major control and influence in MA deal value, especially when the overlap
owners are high.
Table 5 Split sample analysis based on level of total overlap owners
High overlap owners Low overlap owners
Coefficient t
-value Coefficient t
-value Constant -539.214
-.916 272.805
4.026 Total overlap owner
70.089 10.123
-24.295 -1.604
Corporate governance bidder -71.352
-.639 -7.413
-.390 Inv. Prot. bidder
-385.255 -1.536
-46.887 -1.116
Inv. Prot. target -1.613
-.005 -12.543
-.403 Return on shareholder
-7.077 -.582
1.365 1.109
Return on asset -5.526
-.202 -1.375
-.633 Net income
54.236 .982
16.160 -3.516
Notes: , , are significant at level 1, 5, and 10. This table reports the estimated parameters in regression equation 1.
6.4 Findings
The literature has attempted to measure tunneling using different proxies. Berkman, Cole Fu 2008 examine loan guarantees issued by Chinese firms to their controlling shareholders. CHEN, JIAN XU 2008
suggest that dividend policy may also be used to tunnel cash to controlling shareholders. GAO and Kling 2008 use the difference between accounts receivable and accounts payable to related parties as a proxy for tunneling
and show that this measure is related to corporate governance characteristics. JIAN and WONG 2003 show that Chinese firms belonging to business group use related party transactions with their parents in particular trading
goods and services as a way of manipulating earnings. Bae, Kang Kim 2002 find that the value of Korean firms which affiliated with industrial groups declines when they are asked to bail out underperforming firms
within the group through rescue mergers. Bertrand, Mehta Mullainathan 2002 use earnings shock to measure tunneling. This study was the first using the deal value to explain tunneling phenomenon scrutinizing MA
overpayment with high overlap owner. Besides employing deal value to explain tunneling phenomenon, this study focus on agent-principal-principal
problem. Prior research only focused on principal-principal problem and principal-agent problem. This study demonstrate that agent-principal-principal relationship weaken the corporate governance mechanism. The
presence of overlapping owner in the context of merger and acquisition could compromise the monitoring by principals. Conflicting interests between majority-minority shareholders motivate manager to make suboptimal
MA deals.
Tunneling, overlapping owner and investor protection: Evidence from merger and acquisition in Asia
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This study evidences that heterogeneous interest among shareholders trigger noise assessment of manager to make decision about Merger and Acquisition. The authors find that manager are more likely to overpay target
during merger and acquisition when overlap owner, which have stakes in bidder and target firm, is high. The authors find that overpayment, a transfer of wealth from owners of bidder’s firm to overlapping owners, is one
form of tunneling. This study pinpoints that conflict of interest between majority and minority shareholders become more
distinctive as this study employ sample from countries characterized by concentrated ownership. The tendency of tunneling increases with ownership concentration. This condition is worsening by low investor protection and
developing countries tend to take investor protection too lightly. Therefore, investors are still able to expropriate freely.
Figure 2 Agency problem progress
Expropriation implies consequently at micro and macro economic of developing countries. At macro level, Jensen 1986 found that investor protection level is a strong indicator of exchange rate in Asia. Otherwise, at
micro level, due to low standard of disclosure requirement and highly ownership concentration, expropriations usually trigger negative return variability, especially during crisis. Consequently, expropriation or tunneling
through value destroying MA could deteriorate economic condition of developing countries even worse. It is evidenced that expropriation or tunneling decreases firms’ value because of low investor belief. This study
strongly recommends sufficient level of investor protection in Asian countries to prevent tunneling more effectively.
7. Conclusion and limitation
Heterogeneous interests among owners may deteriote constraints of manager performance and tamper
