Related guarantee and implicit tunneling

This paper shows related guarantees increase corporate tunneling. The effect is more pronounce for firms with smaller size, higher liabilities, and poorer profitability. Implicit tunneling has a significant effect on the mechanism of tunneling and bank financing. However, individual tunneling shows a smaller and shorter term effect. Furthermore, economic development, time variant economic freedom, regional economic development, business-government relationship and government intervention are all significant variables that can explain variations in the magnitude of tunneling. Our results are robust in that we provide two Instrumental Variables that can further predict frauds of “unrelated” loans, implicit related transactions and textual analysis on corporate loan announcements. •Considering structural change and macro environment, related bank loans increase corporate tunneling significantly.•Marketization reduces this effect but business-government relationship increases tunneling with higher bank loans.•Group-affiliated firms with implicit related transactions have higher corporate tunneling.•Two IVs both reveal that related guaranteed loans increase corporate tunneling.