Soft budget constraint and expropriation: Evidence from privately-owned firms in China

Using the data of privately-owned firms in China's transition economy, the study examines the effects of soft budget constraint on the expropriation of minority shareholders. The study finds that, compared to small firms, large firms have higher bank loans and are more likely to get government subsidies. However, large firms show higher divergence between cash flow and control rights, more fund occupation by controlling shareholders, and lower market valuation. Moreover, these differences between large and small firms become particularly pronounced when the firms operate in the provinces with poorer fiscal conditions. When firm tax is substituted for firm size, the study gets the similar results. These findings suggest that soft budget constraint can mitigate the expropriation costs of controlling shareholders, and subsequently deteriorate the expropriation of minority shareholders.