Propping and tunneling

In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that...

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Bibliographic Details
Published inJournal of Comparative Economics Vol. 31; no. 4; pp. 732 - 750
Main Authors Friedman, Eric, Johnson, Simon, Mitton, Todd
Format Journal Article
LanguageEnglish
Published San Diego Elsevier Inc 01.12.2003
Elsevier
Elsevier BV
SeriesJournal of Comparative Economics
Subjects
Corporate finance
Debt
Economics
Emerging markets
Entrepreneurs
Entrepreneurship
Finance
Financial management
Institutions
Legal systems
Ownership
Stockholders
P12
K12
G33
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Summary:In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises. Journal of Comparative Economics 31 (4) (2003) 732–750.
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ISSN:0147-5967
1095-7227
DOI:10.1016/j.jce.2003.08.004