The quality of corporate governance, i.e. the effectiveness of institutions that contain agency costs, is a key component of asset allocation. In countries characterized by concentrated ownership, minority share¬holder expropriation, also known as tunneling, is the main concern from the perspective of outside investors. Tunneling can be the outcome of a number of expropriation techniques. A common way to extract value from the controlled corporation is for the dominant shareholder to engage in transactions with it at favorable terms (so-called related party transactions). Informed investors are aware of the risk of tunneling: they determine their reservation price accordingly and will thus discount the share price at which they are willing to invest. In practice, however, the probability and scope of the looming expropriation are hard to gauge ex ante and therefore the appropriate discount is difficult to establish, leading to noisy estimates. In addition, even with perfect pricing, from the perspective of social planners in individual countries, tunneling, by raising firms’ cost of capital, makes equity markets less vibrant, reduces funding opportunities for businesses and ultimately impairs growth. In this project, we plan to bring together top legal and economic scholars from different countries to analyze the regulation of related party transactions and other tools to extract value from a corporation by its controllers. The collection of papers shall be published in a book following a conference where contributors would present a close to final draft to a wider audience.
