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

Author

Listed:
  • Vladimir Atanasov
  • Conrad S. Ciccotello
  • Stanley B. Gyoshev

Abstract

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.

Suggested Citation

  • Vladimir Atanasov & Conrad S. Ciccotello & Stanley B. Gyoshev, 2005. "How Does Law Affect Finance? An Empirical Examination of Tunneling in an Emerging Market," William Davidson Institute Working Papers Series wp742, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2005-742
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    Citations

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    Cited by:

    1. Bernard S. Black & Vikramaditya S. Khanna, 2007. "Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 4(4), pages 749-796, December.
    2. Jeffrey B Miller & Vladimir Lazarov, 2011. "Evaluation of Mass Privatization in Bulgaria," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 53(4), pages 621-646, December.
    3. Karla Hoff & Joseph E. Stiglitz, 2008. "Exiting a Lawless State," Economic Journal, Royal Economic Society, vol. 118(531), pages 1474-1497, August.
    4. Pop, Diana, 2006. "M&A market in transition economies: Evidence from Romania," Emerging Markets Review, Elsevier, vol. 7(3), pages 244-260, September.
    5. Zuzana Fungacova, 2007. "Can the Market Fix a Wrong Administrative Decision? Massive Delisting on the Prague Stock Exchange," CERGE-EI Working Papers wp335, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. repec:dau:papers:123456789/7707 is not listed on IDEAS

    More about this item

    Keywords

    Tunneling; freeze-out; controlling shareholders; appraisal rights; preemptive rights;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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