Does Assets Injection by Large Shareholders Improve Firm Performance

In 2005, China carried on a major reform that allows the previously untradeable shares controlled by large shareholders to become tradable in the secondary market. This reform and subsequent dramatic change of behavior of large shareholders offer researchers a unique experiment to study the behavior of controlling shareholders and its implication for corporate governance. Asset injection, by which large shareholders sell their high quality assets to the listed companies they controlled, became instantly popular after the reform. Our research provides strong evidence that such asset injection improves both the Tobin's Q and the composite financial performance score of the injected firm. Our research suggests this full listing reform aligned the interest of major shareholders with the company and controlling shareholders change their behavior from tunneling to propping.