Ferreting out Tunneling: An Application to Indian Business Groups

By Marianne Bertrand, Paras Mehta, Sendhil Mullainathan. 2002

1,697 citations recorded by the source corpus.

In many countries, controlling shareholders are accused of tunneling, transferring resources from companies where they have few cash flow rights to ones where they have more cash flow rights. Quantifying the extent of such tunneling, however, has proven difficult because of its illicit nature. This paper develops a general empirical technique for quantifying tunneling. We use the responses of different firms to performance shocks to map out the flow of resources within a group of firms and to quantify the extent to which the marginal dollar is tunneled. We apply our technique to data on Indian business groups. The results suggest a significant amount of tunneling between firms in these groups.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/e4aab748df1e0cbc20b943c47bd1f3a7cc6c5f7f

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In Economics and Econometrics

Citations in the corpus

Corporate Governance, Economic Entrenchment and Growth (2005, positive): “Holmén and Högfeldt (2005), using the procedure of Bertrand, Mehta, and Mullainathan (2002), find no evidence of tunneling in Swedish pyramidal groups.”
Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013 (2017, positive): “The Prowess database is widely used by scholars (e.g., Khanna and Palepu 2000; Bertrand, Mehta, and Mullainathan 2002; Gopalan, Nanda, and Seru 2007) to conduct large sample studies on Indian firms.”
Large Foreign Ownership and Firm-Level Stock Return Volatility in Emerging Markets (2011, positive): “In emerging markets, these firms may exhibit higher volatility due to the added risk of potential expropriation (Bae, Kang, and Kim (2002), Bertrand, Mehta, and Mullainathan (2002)).”
Agency Problems in Large Family Business Groups (2003, background): “Bertrand, Mehta, and Mullainathan (2000) present preliminary cross-country evidence supporting the ubiquity of tunneling.”
Controlling firms through the majority voting rule (2005, neutral): “The expropriation of minority shareholders and the tunneling of profits outside the group have been analyzed by, e.g., La Porta et al. (1999), Bebchuk (1999), Bertrand et al. (2002), Bertrand and Mullainathan (2003), Claessens et al. (2002).”
Investor Protection, Optimal Incentives, and Economic Growth (2004, background): “” Bertrand et al. (2002) report that in their sample the average equity stake of directors was 16.7% (7.45% for business groups and 22.99% for stand-alone firms).36 Unfortunately for our analysis, these figures refer to direct holdings only. This makes it hard to compare them with the numbers report”
Agency Conflicts, Investment, and Asset Pricing (2008, neutral): “See also Johnson et al. (2000), Bae et al. (2002), Bertrand et al. (2002), and Dyck and Zingales (2004).”
Tunneling and propping: a justification for pyramidal ownership (2008, background): “Bertrand, Mehta, and Mullainathan (2002) also raise the question how”
Beyond institutional voids: Business groups, incomplete markets, and organizational form (2015, background): “While intra-group cash transfers are common (Bertrand, Mehta, and Mullainathan, 2002; Chang and Hong, 2000; George and Kabir, 2008), the presence of outside directors in the independent legal entities and the oversight of regulatory and market forces gives affiliate firm managements an important…”
Business group affiliation, ownership structure, and the cost of debt (2013, background): “Therefore, a substantial body of literature has viewed a business group as a device through which controlling shareholders expropriate minority shareholders for their private benefit (Bae et al., 2002; Baek et al., 2006; Bertrand et al., 2002; Claessens et al., 2002; Johnson et al., 2000a,b).”
Related-party transactions and corporate governance: The evidence from the Taiwan stock market (2012, background): “However, most anecdotal evidence is indirect ( e.g. Bertrand et al., 2002; La Porta et al., 2000, 2002; Claessens et al., 2002; Faccio et al., 2001), and the findings so far are mixed to ⁎ Corresponding author.”