Studies on the expropriation of minority shareholders of publicly listed firms by their controlling shareholders focus on the publicly listed firm and treat the controlling shareholder as a black box, without providing any direct evidence of the incentives of controlling shareholders to expropriate at the micro level. We analyze pairs of Chinese publicly listed firms and their non-listed controlling shareholders or parents, and link the extent of expropriation of the publicly listed firm to the performance of its controlling shareholder. We document that publicly listed firms with underperforming controlling shareholders extend more intra-group loans to their parents. The market gives a lower valuation to the receivables generated by these loans, when the firm’s controlling shareholder is underperforming, suggesting a higher probability of default. More generally, we document a positive relationship between the market value of one additional dollar of cash on the listed firm’s balance sheet and the performance of its controlling shareholder. These findings help us understand the incentives of controlling shareholders, namely when and why the controlling shareholders expropriate, and establish the incentives of the controlling shareholder as a major determinant of the expropriation of listed firms in China.
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