Propping and tunneling

Friedman, Eric, Johnson, Simon, and Mitton, Todd-Propping and tunneling In countries with weak legal systems, there is a great deal of tunneling by the entrepreneurs who control publicly traded firms. However, under some conditions entrepreneurs prop up their firms, i.e., they use their private funds to benefit minority shareholders. We provide evidence and a model that explains propping. In particular, we suggest that issuing debt can credibly commit an entrepreneur to propping, even though creditors can never take possession of any underlying collateral. This helps to explain why emerging markets with weak institutions sometimes grow rapidly and why they are also subject to frequent economic and financial crises. (C) 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.