Propping and Looting when Investor Protection is Weak

Eric Friedman () and Simon Johnson
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Eric Friedman: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: In countries with weak investor protection, entrepreneurs transfer assets and cash in and out of companies with outside investors. The presence of debt can induce entrepreneurs to steal less from minority shareholders and may induce them to prop up the performance of publicly traded companies using their own funds. But debt can also cause entrepreneurs to loot publicly held firms completely. As a result, countries with weak institutions can have a bimodal distribution in returns for outside equity investors and, potentially, in the macroeconomy.

Keywords: debt/equity; investor protection; looting; propping; weak legal systems (search for similar items in EconPapers)
Date: 1999-10-12
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:199922

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