Propping and Tunneling

Eric Friedman, Simon Johnson and Todd Mitton

No 9949, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In countries with weak legal systems, there is a great deal of tunnelling 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.

JEL-codes: G33 P12 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-ifn
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (216)

Published as Friedman, Eric, Simon Johnson and Todd Mitton. "Propping And Tunneling," Journal of Comparative Economics, 2003, v31(4,Dec), 732-750.

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