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Ferreting out Tunneling: An Application to Indian Business Groups

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  • Marianne Bertrand
  • Paras Mehta
  • Sendhil Mullainathan

Abstract

Owners of business groups are often accused of expropriating minority shareholders by tunneling resources from firms where they have low cash flow rights to firms where they have high cash flow rights. In this paper we propose a general methodology to measure the extent of tunneling activities. The methodology rests on isolating and then testing the distinctive implications of the tunneling hypothesis for the propagation of earnings shocks across firms within a group. When we apply our methodology to data on Indian business groups, we find a significant amount of tunneling, much of it occurring via nonoperating components of profit.

Suggested Citation

  • Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 121-148.
  • Handle: RePEc:oup:qjecon:v:117:y:2002:i:1:p:121-148.
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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