Optimally Restrained Tunneling: The Puzzle of Controlling Shareholders’ “Generous” Exploitation in Bad-Law Jurisdictions

Although controlling shareholder agency problems have been well studied so far, many questions still remain unanswered. In particular, an important puzzle in “bad-law” jurisdictions is: why some controlling shareholders (“roving controllers”) loot all (or substantially all) corporate assets at once, and why others (“stationary controllers”) siphon a part of corporate assets on a continuous basis. To solve this conundrum, this chapter provides analytical frameworks exploring the behaviors and motivations of controlling shareholders. To begin with, I reinterpret Olson’s political economy theory of “banditry” in the context of corporate governance in developing countries. Based on a new taxonomy of controlling shareholders (“roving controllers” and “stationary controllers”), I examine under what circumstances a controlling shareholder chooses to be roving or stationary, and why economically rational controlling shareholders with a long time horizon voluntarily abstain from looting minority shareholders. In addition, although I recognize family corporations’ weaknesses in terms of investor protection, I explain that controlling “family” shareholders tend to be more stationary, and thus improve the quality of corporate governance. Moreover, I explain that a controlling shareholder’s non-pecuniary benefits (i.e., the psychological value gained by corporate insiders when running a business) can potentially lower the level of expropriation from public shareholders.