Tunneling Through Private Equity Placements: Evidence from Japan

Abstract This paper examines the tunneling issue of controlling shareholders, and in particular, this empirical study is conducted to determine whether controlling shareholders are tunneling the wealth of companies by using private equity placements (hereafter, PEPs), which have been frequently used as a means of equity financing in the Japanese market in recent years. We find that the discount rate is higher for PEPs issued to the controlling shareholders compared with PEPs issued to others. This empirical result is robust considering several methods of calculating the discount rate of PEPs. Furthermore, we find that discounts of PEPs are more likely to take place in the ex-ante controlling shareholder case than in the ex-post controlling shareholder case. The findings of this paper mainly make three contributions. Firstly, this paper contributes to prior studies and adds to the empirical evidence on the detailed path of tunneling by controlling shareholders. Secondly, this paper contributes to prior studies related to determinants of the price discount of PEPs. Thirdly, this paper contributes to institutional design in practice.