Economists, legal scholars and courts focus on the wedge between controllers' cash flow and voting rights as perhaps the most important source of agency costs. In this Paper, however, we argue that another important source of agency costs is the nature and scale of other businesses owned by the controlling shareholder. Controllers’ ownership of other businesses—especially in related industries—provides them with opportunities and motive to divert value from one business to another. We further show that controllers' ownership of such businesses allows them to divert value without engaging in self-dealing. We identify a new channel of value diversion—indirect tunneling—and set it apart from other forms of value diversion. We further argue that indirect tunneling cannot be eliminated by adopting new rules against self-dealing or strengthening the enforcement of existing rules. Thus, we reject the common view that a strong anti-self-dealing regime is sufficient to protect investors from value diversion. Lawmakers interested in limiting insiders’ private benefits of control should consider other measures: expanding disclosure rules or structural remedies, such as limiting the scope of business groups.

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