Does tunneling lower employee wages?

Abstract Using a large sample of Chinese firms, we show that tunneling is associated with significantly lower employee compensation and that employee power and awareness mitigate this relation. We also find that, as expected, when the CEO is also the chair of the board, the connection is stronger, suggesting that in this case, employees are more likely to be paid less when tunneling occurs. This is also the case when the CEO holds shares in the company. We also find that state‐owned enterprises (SOEs) tend to mitigate the relation between tunneling and employee pay. Combined, this suggests that a lack of governance aids the relation. Finally, when we investigate which wage components are affected by tunneling, we find that all but one component (i.e., insurance) are negatively related to tunneling.