Tunneling and propping: A justification for pyramidal ownership |
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Authors: | Yohanes E. Riyanto Linda A. Toolsema |
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Affiliation: | 1. Department of Economics, National University of Singapore, AS2 1Arts Link, Singapore 117570, Singapore;2. COELO, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands |
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Abstract: | This paper links existence of the pyramidal ownership structure to tunneling and propping. Tunneling refers to a transfer of resources from a lower-level firm to a higher-level firm in the pyramidal chain, whereas propping concerns a transfer in the opposite direction intended to bail out the receiving firm from bankruptcy. We show that tunneling alone cannot justify the pyramidal structure unless outside investors are myopic, since rational outside investors anticipate tunneling and adjust their willingness-to-pay for the firm’s shares accordingly. With propping, however, they may be willing to be expropriated in exchange for implicit insurance against bankruptcy. |
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Keywords: | G32 L22 |
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