DEFINITION of 'Tunneling'

An illegal business practice in which a majority shareholder or high-level company insider directs company assets or future business to themselves for personal gain. Actions such as excessive executive compensation, dilutive share measures, asset sales and personal loan guarantees can all be considered tunneling. The common thread is the loss to the minority shareholders, whose ownership is lessened or otherwise devalued through inappropriate actions that harm the overall value of the business.


This risk is especially prevalent for investors in emerging markets, where government and regulatory controls may not be sufficient to stop the practice from occurring, often under legal guises. The practice is not reserved to moderately advanced economies; many instances can be found in advanced economies, especially those under systems of "civil law". The U.S. legal system is rooted in "common law", which provides broad enforceable laws with simple maxims like "fairness" and "for the common good". Under civil law, the letter of the law is the most respected measure, so would-be tunnelers can pass an act of tunneling off under certain technicalities, which often hold up in court.

  1. Shareholder

    Any person, company or other institution that owns at least one ...
  2. Corporation

    A legal entity that is separate and distinct from its owners. ...
  3. Stockholders' Equity

    The portion of the balance sheet that represents the capital ...
  4. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding ...
  5. Dilution

    A reduction in the ownership percentage of a share of stock caused ...
  6. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
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