Extraction of private benefits of control by families: tunnelling and trading in a private information environment

Using a sample of Hong Kong listed companies we investigate how private benefits of control are extracted by a family via tunnelling and trading in shares. We find that family ownership is associated with entrenchment/liquidity-using effects, leading to tunnelling and trading by families. Family board overrepresentation is associated with entrenchment/liquidity-restricting effects, facilitating tunnelling but limiting market scrutiny via informed trading. Family board leadership leads to monitoring/liquidity-promoting effects that prevent tunnelling and promote the price discovery process. These effects differ between founder and heir-families. Tunnelling and trading are two independent mechanisms of rent extraction even after controlling for endogeneity