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http://ssrn.com/abstract=902766
 
 

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How Does Law Affect Finance? An Examination of Equity Tunneling in Bulgaria


Vladimir A. Atanasov


College of William and Mary - Mason School of Business

Bernard S. Black


Northwestern University - School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Conrad S. Ciccotello


Georgia State University - Department of Finance

Stanley B. Gyoshev


XFI Centre for Finance and Investment - University of Exeter Business School

May 1, 2009

nearly final version, published in 96 Journal of Financial Economics 155-173 (2010)
ECGI - Finance Working Paper No. 123/2006
McCombs School of Business Research Paper No. FIN-04-06
U of Texas Law Law and Econ Research Paper No. 80
William Davidson Institute Working Paper No. 742
2nd Annual Conference on Empirical Legal Studies Paper
EFA 2007 Ljubljana Meetings Paper

Abstract:     
We model and test the mechanisms through which securities law affects tunneling and tunneling affects firm valuation. In 2002, Bulgaria adopted securities law changes which limit two forms of equity tunneling - dilutive equity offerings and freezeouts. We document that following the change, minority shareholders participate equally in secondary equity offers, where before they suffered severe dilution; freezeout offer prices quadruple; and Tobin's q values rise sharply for firms at high risk of tunneling. At the same time, return on assets declines for high-equity-tunneling-risk firms, suggesting that controlling shareholders partly substitute for reduced equity tunneling by engaging in more cash-flow tunneling. We thus present evidence on (i) the importance of legal rules in limiting equity tunneling, (ii) the role of equity tunneling risk as an important factor in determining equity prices; and (iii) substitution by controlling shareholders between different forms of tunneling.

Number of Pages in PDF File: 50

Keywords: equity tunneling, preemptive rights, dilution, freezeout, corporate governance, securities law, emerging markets

JEL Classification: G34, K22, G15

Accepted Paper Series





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Date posted: May 18, 2006 ; Last revised: May 4, 2010

Suggested Citation

Atanasov, Vladimir A. and Black, Bernard S. and Ciccotello, Conrad S. and Gyoshev, Stanley B., How Does Law Affect Finance? An Examination of Equity Tunneling in Bulgaria (May 1, 2009). nearly final version, published in 96 Journal of Financial Economics 155-173 (2010); ECGI - Finance Working Paper No. 123/2006; McCombs School of Business Research Paper No. FIN-04-06; U of Texas Law Law and Econ Research Paper No. 80; William Davidson Institute Working Paper No. 742; 2nd Annual Conference on Empirical Legal Studies Paper; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=902766

Contact Information

Vladimir A. Atanasov (Contact Author)
College of William and Mary - Mason School of Business ( email )
P.O. Box 8795
Williamsburg, VA 23187-8795
United States
Bernard S. Black
Northwestern University - School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
512-503-2784 (Phone)

Northwestern University - Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)
European Corporate Governance Institute (ECGI)
Brussels
Belgium
Conrad S. Ciccotello
Georgia State University - Department of Finance ( email )
University Plaza
Atlanta, GA 30303-3083
United States
404-651-1711 (Phone)
404-651-4219 (Fax)
Stanley B. Gyoshev
XFI Centre for Finance and Investment - University of Exeter Business School ( email )
University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom
+44-1392-72-3227 (Phone)
+44-1392-262475 (Fax)
HOME PAGE: http://business-school.exeter.ac.uk/about/whoswho/index.php?web_id=Stanley_Gyoshev&tab=profile
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