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Propping and Tunneling

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  • Eric Friedman
  • Simon Johnson
  • Todd Mitton

Abstract

In countries with weak legal systems, there is a great deal of tunnelling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises.

Suggested Citation

  • Eric Friedman & Simon Johnson & Todd Mitton, 2003. "Propping and Tunneling," NBER Working Papers 9949, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9949
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    References listed on IDEAS

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    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • P12 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Enterprises

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