Tunneling and propping: A justification for pyramidal ownership

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Abstract

This paper links existence of the pyramidal ownership structure to tunneling and propping. Tunneling refers to a transfer of resources from a lower-level firm to a higher-level firm in the pyramidal chain, whereas propping concerns a transfer in the opposite direction intended to bail out the receiving firm from bankruptcy. We show that tunneling alone cannot justify the pyramidal structure unless outside investors are myopic, since rational outside investors anticipate tunneling and adjust their willingness-to-pay for the firm's shares accordingly. With propping, however, they may be willing to be expropriated in exchange for implicit insurance against bankruptcy. (C) 2008 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)2178-2187
Number of pages10
JournalJournal of Banking & Finance
Volume32
Issue number10
DOIs
Publication statusPublished - Oct-2008
EventInternational Summer School on Risk Measurement and Control - , Italy
Duration: 1-Jun-2007 → …

Keywords

  • Tunneling
  • Propping
  • Pyramids
  • Ownership structure
  • Business groups
  • BUSINESS GROUPS
  • CORPORATE GOVERNANCE
  • ENTRENCHMENT

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