Environmental investment and tunneling: A substitute for corporate governance

Abstract

Controlling shareholders extract private benefits and expropriate minority shareholders through “tunneling” behavior, which causes difficulties for many listed companies. Extant research typically explores corporate governance constraint mechanisms but ignores the role of environmental investments. To address this issue, we investigated the effect of corporate environmental investment (CEI) on tunneling by controlling shareholders. By analyzing a sample of Chinese listed companies during the period 2008 to 2021, we found that CEI constrains tunneling by controlling shareholders, and this effect is driven by non-state-owned enterprises. Further tests demonstrated that the negative relationship between CEI and tunneling is more pronounced in firms with poor corporate governance, which supports our argument that CEI serves as a substitute for corporate governance. The channel analysis revealed that CEI diminishes resources and improves reputation, resulting in reduced tunneling. Overall, the research findings offer guidance and insight for regulatory authorities to formulate relevant policies and effectively ameliorate tunneling by controlling shareholders.