Hedge fund cliques and related-party transactions: evidence from China

Based on a sample of Chinese nonfinancial A-share listed firms from 2010 to 2023, we investigate the governance role of hedge fund cliques. Using the Louvain algorithm to identify cliques within the network of hedge funds, we find that hedge fund cliques play a significant role in curbing tunnelling by controlling shareholders, as these firms have fewer related-party transactions. The effect is more pronounced at firms that are privately controlled, have greater separation between ownership and control, and have weaker internal controls. Our mechanism analysis further suggests that hedge fund cliques strengthen governance by increasing the frequency of meetings between shareholders and the board. Overall, the findings highlight the governance potential of hedge fund coordination and have implications with respect to enhancing investor protection and market oversight in emerging economies.