How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market

Vladimir Atanasov (), Conrad S. Ciccotello and Stanley Gyoshev

No wp742, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to “tunnel” wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two-thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares’ intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms.

Keywords: Tunneling; freeze-out; controlling shareholders; appraisal rights; preemptive rights (search for similar items in EconPapers)
JEL-codes: G34 K22 (search for similar items in EconPapers)
Pages: pages
Date: 2005-01-01
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fin, nep-law, nep-reg and nep-tra
References: View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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