Tunneling or propping: an analysis of connected transactions of Thai listed companies

The severity of the agency problem between controlling shareholders and minority shareholders among Thai business groups induces a high incentive for controlling shareholders to transfer resources from low- to high- cash-flow-right firms to benefit controlling shareholders at the expense of minority shareholders (tunneling). On the contrary, many authors comment that to attract shareholders to invest in low-cash-flow-right firms, there are unwritten commitments by business groups to prop up the performances of their member firms (propping). Thus, this study attempts to find the conclusion that investors perceive that controlling shareholders have incentives to tunnel or to prop through connected transactions between listed firms in the Stock Exchange of Thailand (SET) and connected parties during 2014-2019 employing event studies, propensity score matchings (PSMs), and regressions. Furthermore, this research also examines types of connected transactions and firm characteristics that probably lead to investors’ perception of tunneling or propping.Using event study methodology, empirical results show that Thai investors respond positively to overall connected transactions. Then, I compare controlling shareholders’ ownerships in listed firms that undertake connected transactions to those in connected parties and then separate the whole sample into two subsamples: low- and the high- cash-flow-right listed firms. Event-studied results show statistically significant positive and negative market reactions to the sample of low- and high- cash-flow-right firms’ connected transactions respectively, moreover, PSM results show statistical significances of differences between market responses to these two subgroups. These empirical outcomes indicate investors’ anticipation that listed firms transfer wealth from high- to low- cash-flow-right firms through connected transactions which support the propping hypothesis.After classifying connected transactions into five types defined by the Securities and Exchange Commission (SEC) and various types using contents in public announcements, empirical evidence from event studies and PSMs show that Thai investors show positive, negative, or indifferent responses to different categories of related transactions. Furthermore, empirical results imply market expectations that controlling shareholders use connected transactions relating to assets and services (SEC’s type 4) and connected transactions selling assets to prop up their member firms’ performance.Regression results exhibit that most of the company characteristic variables’ statistical significations and their signs are similar when I use a full sample or sample of low-cash-flow-right companies. More importantly, most of the statistically important characteristics of listed firms are dissimilar when I perform regression analyses using different subsamples: low- and high- cash-flow-right firms. However, no specific characteristic of listed companies undertaking connected transactions supports tunneling or propping since empirical evidence does not report any statistically substantially opposite signs of the same variable’s coefficients when I employ different subsamples.