How does law affect finance? An examination of equity tunneling in Bulgaria
Atanasov, Vladimir A.
Black, Bernard S.
Ciccotello, Conrad S.
Gyoshev, Stanley B.
Harvard Law School Forum on Corporate Governance and Financial Regulation
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. We document that following the change, minority shareholders participate equally in secondary equity offers, where before they suffered severe dilution; freezeout offer prices quadruple; and Tobin's q values rise sharply for firms at high risk of tunneling. 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.
Draft version dated May 2010 deposited in SSRN. Final version, published in Journal of Financial Economics
Vol. 2009, Issue June
Place of publication