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Propping and Tunneling

Year: 2003

Type: article

Abstract: 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.

Source: Journal of Comparative Economics

DOI: 10.3386/w9949

Authors: Eric Friedman, Simon Johnson, Todd Mitton

Institutions: Cornell University, National Bureau of Economic Research, Massachusetts Institute of Technology, Brigham Young University

Language: English

Topic: Corporate Finance and Governance

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Peace, justice, and strong institutions, Decent work and economic growth

Open Access status: green

Funders: California Institute of Technology, Samsung