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Ferreting Out Tunneling: An Application to Indian Business Groups

Marianne Bertrand, Paras Mehta and Sendhil Mullainathan
The Quarterly Journal of Economics
Vol. 117, No. 1 (Feb., 2002), pp. 121-148
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2696484
Page Count: 28
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Ferreting Out Tunneling: An Application to Indian Business Groups
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Abstract

Owners of business groups are often accused of expropriating minority share-holders by tunneling resources from firms where they have low cash flow rights to firms where they have high cash flow rights. In this paper we propose a general methodology to measure the extent of tunneling activities. The methodology rests on isolating and then testing the distinctive implications of the tunneling hypothesis for the propagation of earnings shocks across firms within a group. When we apply our methodology to data on Indian business groups, we find a significant amount of tunneling, much of it occurring via nonoperating components of profit.

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