Can employee stock ownership plans deter tunnelling? Evidence from related party transactions in China

This study examines the effect of employee stock ownership plans (ESOPs) on tunnelling transactions. ESOPs unite employees in the common financial interest and psychological sense of ownership, which increases the willingness and ability of employees to monitor managerial opportunism and reduce tunnelling transactions between related parties. Moreover, the results show that information disclosure and internal control may be possible channels through which ESOPs affect tunnelling. In addition, the deterrent effect of ESOPs on tunnelling is more pronounced for firms with weaker managerial power, weaker external corporate governance mechanisms, non-SOEs, and firms outside the high-tech industry. Fundamentally, the study provides novel evidence of the governance effect of ESOPs on corporate tunnelling transactions. It reveals not only a power tug-of-war between employees and management but also a substitution effect between informal institutions (i.e. employee governance) and formal corporate governance mechanisms, providing important insights into possible ways to address the global issue of tunnelling.