Tunneling: Evidence from Family Business Groups of Pakistan

Abstract

This paper investigates a critical aspect of agency conflict between dispersed minority and majority (controlling) shareholders in firms affiliated with family business groups. Corporate governance literature indicates that majority shareholders can exploit minority shareholders through tunneling the resources for their benefit or they provide insurance through propping to group firms in distress. For years 2009-2013, the study uses a unique hand-picked data set of 290 non-financial (i.e. 177 family business group and 113 stand-alone or non-group) firms listed on Pakistan Stock Exchange (PSX). The study finds that majority shareholders expropriate minority shareholders by tunneling (transferring) im portant resources from low cash-flow rights firms affiliated with family business group. While measuring the sensitivities of firms to the industry earnings shocks, the em pirical results reveal that about 15% resources of low cash-flow rights firms are tunneled to high cash-flow rights firms in family business groups. It is also confirmed that equity held by directors representing majority shareholders has negative relationshi p with earnings of minority shareholders in low cash-flow rights firms affiliated with family business groups. These findings have certain policy im plications for governance related regulation development, diverse shareholders and firm management. JEL Classification: G28, G32, G38, M48Keywords: Tunneling, business groups, corporate governance, ownershi p concentration.1. IntroductionBusiness groups exist globally especially in the developing countries having weak protection of minority shareholders. In many countries3, such business groups dominate industrial activity of the private-sector (Kali & Sarkar, 2011). Controlling 1 PhD Scholar, NUST Business School, National University of Sciences and Technology, Islamabad, Pakistan. Email: shahid.hussain@nbs.nust.edu.pk2 Assistant Professor, NUST Business School, National University of Sciences and Technology, Islamabad, Pakistan. Email: nabeel.safdar@nbs.nust.edu.pk3 South Africa (Africa); Brazil and Chile (South America); South Korea, Indonesia, Malaysia, Hong Kong, and Taiwan (East Asia); Pakistan and India (South Asia).Business & Economic Review: Vol. 10, No.2 2018 pp. 97-122DOI: dx.doi.org/10.22547/BER/10.2.5ARTICLE HISTORY17 Jan, 18 Submission Received 6 Mar, 18 First Review 13 Mar, 18 Revised Version Received 12 Apr, 18 Second Review15 Apr, 18 Revised Version Received 30 Apr, 18 Accepted