Controlling shareholders in China can divert assets from listed firms or coerce firms to serve as guarantors on questionable loans. A new rule was enacted prohibiting diversion for ‘non-operational' purposes, and firms complying with this rule experienced a reduction in related party...

A major threat to the development of financial markets in emerging markets is “tunneling.” In China, this took on the form of controlling shareholders diverting assets from listed firms or coercing firms to serve as guarantors on questionable loans. A new set of rules enacted in 2005...