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We model and test the mechanisms through which securities law affects tunneling and tunneling affects firm valuation. In 2002, Bulgaria adopted securities law changes which limit two forms of equity tunneling – dilutive equity offerings and freezeouts.
Following the changes, minority shareholders participate equally in secondary equity offers, where before they suffered severe dilution; freezeout offer price/sales ratios quadruple; and Tobin’s q rises sharply for firms at high risk of tunneling, relative to lower risk firms. . At the same time, return on assets declines for high-equity-tunneling-risk firms, suggesting that controlling shareholders partly substitute for reduced equity tunneling by engaging in more cash- flow tunneling. We thus present evidence on (i) the importance of legal rules in limiting equity tunneling, (ii) the role of equity tunneling risk as an important factor in determining equity prices; and (iii) substitution by controlling shareholders between different forms of tunneling.
Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting...
In France, the regulation of related party transactions (RPTs) involves three steps following the notification to the board of an RPT. First, the board...
This study documents how group trademarks, comprising the business group’s name and logo, can be used for the benefit of controlling families at the...