Tunneling Through Share Issuance

Abstract:     
We explore a novel way of equity-tunneling in which controlling shareholders sell shares above fair price to minority investors. We study this with a hand-collected dataset containing the ownership stakes of controlling shareholders in an emerging market over the past 20 years. When issuing shares the controlling shareholder can either maintain or change his ownership stake depending on how many of the new shares he subscribes. Issuance predicts poor future returns only when the stake of the controlling shareholder is significantly reduced. Consistent with tunneling, the result is stronger in the absence of institutional minority investors and during hot markets.

Number of Pages in PDF File: 60

Keywords: tunneling, share issuance, market timing, large shareholders

JEL Classification: G32

working papers series