Tunneling Behavior and The Impact Caused by The Major Shareholder - A Case Study of Yunnan Bio valley Pharmaceutical Co., Ltd.

Abstract

With the development of China's economy and capital markets, some companies have faced the problem of high capital needs. In this context, the phenomenon of shareholders of companies occupying the company's capital to hollow out the company for other purposes has emerged for a while. This paper presents a case study of Yunnan Biovalley Pharmaceutical Co., Ltd., in which the controlling shareholder appropriated the company’s funds. The study found that the following conditions made the situation of hollowing out easy to occur. First, there is a high equity concentration of major shareholders. Secondly, the company's internal governance is negligent. Finally, external supervision has insufficient strength. The auditors or sponsors do not rigorously implement the review and supervision process. Based on this situation, this paper uses the event study method to analyze the movements of share prices of the company before and after the event to find out the impact of the event of hollowing out on the minority shareholders. Through analyzing the hollowing out on the company's short-term solvency and profitability according to the company's financial indicators, so as to find out the impact of the tunneling behavior on the company's business development. Finally, the paper makes some relevant recommendations to reduce the frequency of tunneling. First, for the corporation, they should adjust the company's internal shareholding rate, improve the company's internal self-examination, and set up a relevant highly efficient accountability system. Secondly, external auditors and sponsor institutions should strengthen the supervision and punishment of the company's information disclosure to effectively prevent the occurrence of hollowing out.