Working Paper: NBER ID: w11368
Authors: Heitor Almeida; Daniel Wolfenzon
Abstract: We provide a rationale for pyramidal ownership (the control of a firm through a chain of ownership relations) that departs from the traditional argument that pyramids arise to separate cash flow from voting rights. With a pyramidal structure, a family uses a firm it already controls to set up a new firm. This structure allows the family to 1) access the entire stock of retained earnings of the original firm, and 2) to share the new firm's non-diverted payoff with minority shareholders of the original firm. Thus, pyramids are attractive if external funds are costlier than internal funds, and if the family is expected to divert a large fraction of the new firm's payoff; conditions that hold in an environment with poor investor protection. The model can differentiate between pyramids and dual-class shares even in situations in which the same deviation from one share-one vote can be achieved with either method. Unlike the traditional argument, our model is consistent with recent empirical evidence that some pyramidal firms are associated with small deviations between ownership and control. We also analyze the creation of business groups (a collection of multiple firms under the control of a single family) and find that, when they arise, they are likely to adopt a pyramidal ownership structure. Other predictions of the model are consistent with systematic and anecdotal evidence on pyramidal business groups.
Keywords: pyramidal ownership; family business groups; investor protection; corporate governance
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor investor protection (G24) | pyramidal ownership structures (G32) |
| pyramidal ownership structures (G32) | access to entire stock of retained earnings (G34) |
| pyramidal ownership structures (G32) | sharing of security benefits with minority shareholders (G34) |
| costlier external funding (G19) | establishment of new firms through pyramidal structures (L26) |
| firm characteristics (investment requirements and profitability) (G31) | choice between pyramidal and horizontal structures (L22) |
| low security benefits relative to investment needs (H55) | establishment of pyramids (N60) |
| weak investor protections (G38) | prevalence of pyramidal structures (C46) |
| pyramidal structures (L22) | lower ultimate ownership concentrations (G32) |
| pyramidal structures (L22) | optimization of family's control and financial benefits (D14) |