Does the Regulation on Shareholding Reduction Affect Tunneling by Major Shareholders in Listed Companies?

The regulation on shareholding reduction refers to the institutional constraints on major shareholders’ shareholding reduction transactions in listed companies. Existing research has primarily focused on the positive effects of reduction regulation, paying less attention to their negative impacts such as regulatory costs. This paper employs a difference-in-differences model, using the reduction regulation policy issued by the Securities Regulatory Commission in May 2017 as an exogenous shock, to examine the economic consequences of the regulation. The results show that reduction regulation leads to higher timing costs and information disclosure costs for major shareholders. To avoid the excessive transaction costs imposed by the regulation, major shareholders engage in tunneling for compensation, manifested as increased fund occupation, more aggressive dividend policies, and more related-party transactions. Further analysis reveals that the tunneling induced by reduction regulation is more pronounced in non-state-owned enterprises, firms with no actual reductions, and firms with a lower degree of separation between ownership and control. Moreover, Compared to control firms with lower propensity to reduce holdings, those with higher propensity are more affected by the regulation and exhibit more significant tunneling by major shareholders.