How Does Law Affect Finance? An Examination of Equity Tunneling in Bulgaria

How Does Law Affect Finance? An Examination of Equity Tunneling in Bulgaria

Vladimir Atanasov, Bernard Black, Conrad Ciccotello, Stanley Gyoshev

Series number :

Serial Number: 

Date posted :

May 01 2006

Last revised :

January 22 2019
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  • law and finance • 
  • financial tunneling • 
  • freeze-out

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.

Published in

Published in: 
Publication Title: 
Journal of Financial Economics
Pages 155-173 (2010)


Real name:
Vladimir Atanasov
Fellow, Research Member
Northwestern University Law School and Kellogg School of Management Law School
Real name:
Conrad Ciccotello
Real name:
Stanley Gyoshev