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Propping and Looting when Investor Protection is Weak

Author

Listed:
  • Eric Friedman

    (Rutgers University)

  • Simon Johnson

    (MIT)

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.

Suggested Citation

  • Eric Friedman & Simon Johnson, 1999. "Propping and Looting when Investor Protection is Weak," Departmental Working Papers 199922, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:199922
    as

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