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

50 Pages Posted: 18 May 2006 Last revised: 4 May 2010

Vladimir A. Atanasov

College of William and Mary - Mason School of Business

Bernard S. Black

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

Conrad S. Ciccotello

Daniels College of Business, University of Denver

Stanley B. Gyoshev

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

Date Written: May 1, 2009

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.

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

JEL Classification: G34, K22, G15

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; EFA 2007 Ljubljana Meetings Paper; 2nd Annual Conference on Empirical Legal Studies Paper; William Davidson Institute Working Paper No. 742. Available at SSRN: https://ssrn.com/abstract=902766

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 - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (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

Daniels College of Business, University of Denver ( email )

2201 S. Gaylord St
Denver, CO 80208-2685
United States

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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