In the paper Channeling Funds into the Group: IPO Pricing in Business Groups, which was recently made publicly available on SSRN, we demonstrate that business groups use financial intermediaries to boost the stock prices of affiliated firms in initial public offerings (IPO). This is done when mutual funds belonging to the group strategically participate in the IPO’s that originate from the group during the road show, and subsequently sell their holdings quickly after the IPO.

In the past decade there has been increasing interest in pyramidal business groups and in the ability of group owners to transfer assets from one firm in the pyramid to another. This phenomenon, dubbed “tunneling” by Kogut and Spicer (1998) and Johnson (2000), can take many forms such as transfer pricing, transfer of goods at nonmarket prices and inflated payments for intangibles. Much of the research examined the internal capital markets in these groups yet the theoretical possibility of transferring resources from external sources into the group’s internal capital markets, an activity we refer to in this paper as “channeling” was not previously addressed.

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