Unbundling and Measuring Tunneling

Managers and controlling shareholders can extract (“tunnel”) wealth from firms in many different ways. We develop a framework for analyzing what we see as the four main types of “tunneling” transactions: cash flow tunneling, asset tunneling “out,” asset tunneling “in,” and equity tunneling. We develop a simple model of how each type of tunneling affects accounting and share price metrics, develop implications for asset pricing models, and illustrate our approach with several case studies. Our framework can help regulators design more effective antitunneling rules, help investors and analysts evaluate tunneling risk, and help shareholders provide evidence on harm from tunneling in litigation.

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