Propping and Tunneling

40 Pages Posted: 9 Sep 2003 Last revised: 4 Apr 2022

See all articles by Eric Friedman

Eric Friedman

Cornell University - Operations Research & Industrial Engineering

Simon Johnson

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER)

Todd Mitton

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Date Written: September 2003

Abstract

In countries with weak legal systems, there is a great deal of tunnelling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises.

Suggested Citation

Friedman, Eric and Johnson, Simon and Mitton, Todd, Propping and Tunneling (September 2003). NBER Working Paper No. w9949, Available at SSRN: https://ssrn.com/abstract=441582

Eric Friedman

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States
607-255-9130 (Phone)
607-255-9129 (Fax)

Simon Johnson (Contact Author)

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center ( email )

United States
617-253-8412 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Todd Mitton

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States
801-422-1763 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
314
Abstract Views
3,596
rank
132,224
PlumX Metrics