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How does law affect finance? An examination of equity tunneling in Bulgaria

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Author Info

  • Atanasov, Vladimir
  • Black, Bernard
  • Ciccotello, Conrad
  • Gyoshev, Stanley

Abstract

We model and test the mechanisms through which law affects tunneling and tunneling affects firm valuation. In 2002, Bulgaria adopted legal changes which limit equity tunneling through dilutive equity offerings and freezeouts. Following the changes, minority shareholders participate equally in equity offerings, where before they suffered severe dilution; freezeout offer price ratios quadruple; and Tobin's q rises sharply for firms at high risk of tunneling. The paper shows the importance of legal rules in limiting equity tunneling, the role of equity tunneling risk as a factor in determining equity prices, and substitution by controlling shareholders between different forms of tunneling.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 96 (2010)
Issue (Month): 1 (April)
Pages: 155-173

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Handle: RePEc:eee:jfinec:v:96:y:2010:i:1:p:155-173

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Equity tunneling Preemptive rights Dilution Freezeout Controlling shareholder Securities law Emerging markets;

References

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Citations

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Cited by:
  1. Paligorova, Teodora & Xu, Zhaoxia, 2012. "Complex ownership and capital structure," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 701-716.
  2. Lev Ratnovski, 2013. "Liquidity and Transparency in Bank Risk Management," IMF Working Papers 13/16, International Monetary Fund.
  3. Fernando Lefort & Rodrigo Gonzalez, 2011. "Holding Company Discounts and Business Groups Optimal Bailout of Subsidiaries," Working Papers 34, Facultad de Economía y Empresa, Universidad Diego Portales.
  4. Black, Bernard S. & de Carvalho, Antonio Gledson & Gorga, Érica, 2012. "What matters and for which firms for corporate governance in emerging markets? Evidence from Brazil (and other BRIK countries)," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 934-952.
  5. Braga-Alves, Marcus V. & Morey, Matthew, 2012. "Predicting corporate governance in emerging markets," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1414-1439.
  6. Larrain, Borja & Urzúa I., Francisco, 2013. "Controlling shareholders and market timing in share issuance," Journal of Financial Economics, Elsevier, vol. 109(3), pages 661-681.
  7. Zuzana Fungáčová & Jan Hanousek, 2011. "Determinants of Firm Delisting on the Prague Stock Exchange," Prague Economic Papers, University of Economics, Prague, vol. 2011(4), pages 348-365.
  8. Thomas O'Connor & Julie Byrne, 2013. "Governance and the corporate life-cycle," Economics, Finance and Accounting Department Working Paper Series n248-13.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.

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