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How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market

  • Vladimir Atanasov

    ()

  • Conrad S. Ciccotello

    ()

  • Stanley B. Gyoshev

    ()

This paper documents that law affects finance in emerging markets through the methods used by controlling shareholders to “tunnel” wealth out of the firm. We find that Bulgarian securities law enabled financial tunneling via dilution and freeze-out tender offers. During the period 1999- 2001, about two-thirds of the 1,040 firms on the Bulgarian Stock Exchange were delisted. Freeze-out tender offers for minority shares averaged about 25% of the shares’ intrinsic value. Bulgarian securities law changes in 2002 made financial tunneling more costly for controlling shareholders. Subsequent increases in stock market valuations and liquidity suggest that controlling shareholders have shifted from financial tunneling to less value-destroying methods, such as transfer pricing, to extract wealth from firms.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp742.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp742.

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Length: pages
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:wdi:papers:2005-742
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