Family Business Groups and Tunneling Framework: Application and Evidence from Pakistan

In Pakistan there is a ubiquity of firms in which there exists a controlling shareholder, usually in the form of the family. By and large this control is maintained via crossshareholding and inter-locked directorships which in turn is facilitated by the pyramidal organization of these firms. Moreover, these controlling families have often been alleged of tunneling resources from firms in which they have few cash flow rights to ones in which they have more cash flow rights. This paper attempts to quantify the extent of tunneling prevalent in Pakistani family business groups. The framework that is adopted is one that has been presented by Mullainathan et al. (2000): we use the responses of different firms to performance shocks and map out the flow of resources within a group of firms to quantify the extent to which the marginal rupee is tunneled. We apply this technique to data on Pakistan business groups.