Cash Flow Diversion and Corporate Governance: Evidence from Russia

Using the unique dataset of banking transactions data that contains 236 million transactions of 1.7 million …rms, I identify "spacemen", short-lived special purpose entities created for cash ‡ow diversion purposes. I estimate diversion in Russia as 11.3% of GDP in 2003 and 13.1% of GDP in 2004 that corresponds to tax evasion 4.6%-5.0% and 5.4%-5.8% of GDP accordingly. Based on transfers to "spacemen", I construct a direct measure of cash ‡ow diversion for 180 public companies. On average, …rms divert 18% of their real pro…t or 2.6% of revenue. I …nd that big corporations evade 50%-70% less than small ones. Finally, I document that either government ownership or commonly advocated good corporate governance practices such as audit by a reputable …rm, and presence of a foreign director on board do not help to curb diversion activities.