NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Propping and Tunneling

Eric Friedman, Simon Johnson, Todd Mitton

NBER Working Paper No. 9949
Issued in September 2003
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w9949

Published: Friedman, Eric, Simon Johnson and Todd Mitton. "Propping And Tunneling," Journal of Comparative Economics, 2003, v31(4,Dec), 732-750. citation courtesy of

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