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Tunneling and Propping: A Justification for Pyramidal Ownership

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  • Riyanto, Yohanes E.
  • Toolsema, Linda A.

    (Groningen University)

Abstract

This paper presents a formal model of tunneling and propping in a pyramidal ownership structure. Tunneling refers to controlling shareholders shifting resources from one firm to another in the same pyramid. Propping is tunneling that is done to save the receiving firm from bankruptcy. We compare the pyramidal ownership structure to the horizontal ownership structure, in which shifting resources between firms is not possible (i.e. illegal). We show that tunneling may justify the pyramidal structure only in the presence of myopic investors or in combination with propping

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 04E29.

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Date of creation: 2004
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Handle: RePEc:dgr:rugsom:04e29

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References

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  1. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection and Corporate Valuation," NBER Working Papers 7403, National Bureau of Economic Research, Inc.
  2. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
  3. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
  4. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  5. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2000. "Ferreting Out Tunneling: An Application to Indian Business Groups," NBER Working Papers 7952, National Bureau of Economic Research, Inc.
  6. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
  7. Kee-Hong Bae & Jun-Koo Kang & Jin-Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
  8. Cheung, Yan-Leung & Rau, P. Raghavendra & Stouraitis, Aris, 2006. "Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong," Journal of Financial Economics, Elsevier, vol. 82(2), pages 343-386, November.
  9. Michael L. Lemmon & Karl V. Lins, 2003. "Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis," Journal of Finance, American Finance Association, vol. 58(4), pages 1445-1468, 08.
  10. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
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Cited by:
  1. Karle, H. & Klein, T.J. & Stahl, K.O., 2011. "Ownership and Control in a Competitive Industry," Discussion Paper 2011-013, Tilburg University, Tilburg Law and Economic Center.
  2. Bhaumik, Sumon K. & Zhou, Ying, 2014. "Do Business Groups Help or Hinder Technological Progress in Emerging Markets? Evidence from India," IZA Discussion Papers 7885, Institute for the Study of Labor (IZA).
  3. Anaïs Hamelin, 2010. "Is there tunneling in Small Business Groups? Evidence from French SMEs," Working Papers CEB 10-003.RS, ULB -- Universite Libre de Bruxelles.
  4. 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.
  5. Victor Dorofeenko & Larry Lang & Klaus Ritzberger & Jamsheed Shorish, 2008. "Who controls Allianz?," Annals of Finance, Springer, vol. 4(1), pages 75-103, January.
  6. Crisóstomo, Vicente Lima & López-Iturriaga, Félix Javier & Vallelado González, Eleuterio, 2014. "Nonfinancial companies as large shareholders alleviate financial constraints of Brazilian firm," Emerging Markets Review, Elsevier, vol. 18(C), pages 62-77.
  7. Belot, François, 2010. "Excess control rights and corporate acquisitions," Economics Papers from University Paris Dauphine 123456789/5922, Paris Dauphine University.
  8. Jang, Hasung & Kang, Hyung Cheol & Park, Kyung Suh, 2005. "The Choice of Group Structure: Divide and Rule," CEI Working Paper Series 2005-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  9. Cheung, Yan-Leung & Qi, Yuehua & Raghavendra Rau, P. & Stouraitis, Aris, 2009. "Buy high, sell low: How listed firms price asset transfers in related party transactions," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 914-924, May.
  10. Dow, Sandra & McGuire, Jean, 2009. "Propping and tunneling: Empirical evidence from Japanese keiretsu," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1817-1828, October.
  11. Kali, Raja & Sarkar, Jayati, 2011. "Diversification and tunneling: Evidence from Indian business groups," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 349-367, September.
  12. Shirley J. Ho & Hao-Chang Sung, 2012. "The Informational and Strategic Impacts of Real Earnings Management," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 355-380, November.

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