Wealth expropriation by noncontrolling block shareholders in Chinese listed firms: Insights from the role of appointed executive directors

This study examines the wealth appropriation of noncontrolling block (NCB) shareholders in Chinese publicly listed firms from 2008 to 2020, with a focus on executive directors appointed by these shareholders. Leveraging data on related party transactions (RPTs) and executive director appointments, we demonstrate that firms with executive directors appointed by NCB shareholders exhibit higher levels of RPTs with these shareholders. Mechanism analysis reveals that board appointments amplify NCB shareholders’ motivations and capabilities for tunneling, thus increasing their propensity to extract private benefits of control. Cross-sectional analysis indicates that the expropriation effect is mitigated in firms with stronger internal governance, those with higher external monitoring levels, and those located in regions with more advanced legal systems. Conversely, this effect is intensified in firms where there are greater potential gains from expropriation. Furthermore, firms engaging in more RPTs with NCB shareholders are more likely to experience financial distress and a decline in firm value, suggesting that these shareholders exploit opportunities for private gains. This research contributes to the literature by shedding light on the dark side of the presence of NCB shareholders and the impact of executive directors appointed by them on RPTs.