TY  - JOUR
AU  - Friedman,Eric
AU  - Johnson,Simon
AU  - Mitton,Todd
TI  - Propping and Tunneling
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9949
PY  - 2003
Y2  - September 2003
UR  - http://www.nber.org/papers/w9949
L1  - http://www.nber.org/papers/w9949.pdf
N1  - Author contact info:
Simon Johnson
MIT Sloan School of Management
100 Main Street, E52-562
Cambridge, MA 02142
Tel: 617/290-9618
Fax: 617/253-2660
E-Mail: sjohnson@mit.edu

Todd Mitton
Marriott School
Brigham Young University
684 TNRB
Provo, UT 84602
Tel: 801/422-1763
E-Mail: todd.mitton@byu.edu
AB  - 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.
ER  -