Unbundling and Measuring Tunneling

Abstract

Managers and controlling shareholders can extract wealth from firms in many different ways. We develop here a framework for analyzing different types of "tunneling" transactions. We divide tunneling into three broad groups: cash flow, asset, and equity tunneling. We model each type of tunneling as decomposable into a probability of tunneling and a magnitude. We present a simple model of how each type of tunneling affects share prices and financial metrics and provide two detailed case studies -- Gazprom in Russia and Coca-Cola in the United States -- to illustrate how these types of tunneling can occur in both emerging and developed markets. Finally, we explore a number of uses of our decomposition approach -- for empirical research into the nature and extent of tunneling; for asset pricing, especially in high-tunneling-risk environments; for legal regulation of tunneling; and for accounting rules.

Keywords: tunneling, dilution, freezeout, transfer pricing, shareholder protection

JEL Classification: G32, G34, K22