Optimally Restrained Tunneling: The Puzzle of Controlling Shareholders’ “Generous” Exploitation in Bad-Law Jurisdictions

Optimally Restrained Tunneling: The Puzzle of Controlling Shareholders’ “Generous” Exploitation in Bad-Law Jurisdictions

Sang Yop Kang

Series number :

Serial Number: 
410/2018

Date posted :

July 19 2018

Last revised :

July 18 2018
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Keywords

  • Corporate governance • 
  • controlling shareholder • 
  • Bad-Law Jurisdiction • 
  • Related Party Transaction • 
  • Roving Controller • 
  • Stationary Controller • 
  • Controlling Family Shareholder • 
  • Family Corporation • 
  • self-dealing • 
  • tunneling • 
  • Game Theory • 
  • agency problem • 
  • Pecuniary Benefits • 
  • Non-Pecuniary Benefits • 
  • investor protection

Although controlling shareholder agency problems have been well studied so far, many questions still remain unanswered.

In particular, an important puzzle in “bad-law” jurisdictions is: why some controlling shareholders (“roving controllers”) loot all (or substantially all) corporate assets at once, and why others (“stationary controllers”) siphon a part of corporate assets on a continuous basis. To solve this conundrum, this chapter provides analytical frameworks exploring the behaviors and motivations of controlling shareholders. To begin with, I reinterpret Olson’s political economy theory of “banditry” in the context of corporate governance in developing countries. Based on a new taxonomy of controlling shareholders (“roving controllers” and “stationary controllers”), I examine under what circumstances a controlling shareholder chooses to be roving or stationary, and why economically rational controlling shareholders with a long time horizon voluntarily abstain from looting minority shareholders. In addition, although I recognize family corporations’ weaknesses in terms of investor protection, I explain that controlling “family” shareholders tend to be more stationary, and thus improve the quality of corporate governance. Moreover, I explain that a controlling shareholder’s non-pecuniary benefits (i.e., the psychological value gained by corporate insiders when running a business) can potentially lower the level of expropriation from public shareholders.
 

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