Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Theory of Pyramidal Ownership and Family Business Groups

Contents:

Author Info

  • Heitor Almeida
  • Daniel Wolfenzon
Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w11368.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11368.

    as in new window
    Length:
    Date of creation: May 2005
    Date of revision:
    Publication status: published as Almeida, Heitor and Daniel Wolfenzon. "A Theory of Pyramidal Ownership and Family Business Groups." Journal of Finance 61 (2006): 2637-2681.
    Handle: RePEc:nbr:nberwo:11368

    Note: CF
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Julian Franks & Colin Mayer, 2001. "Ownership and Control of German Corporations," OFRC Working Papers Series, Oxford Financial Research Centre 2001fe11, Oxford Financial Research Centre.
    2. Kim, Se-Jik, 2004. "Bailout and conglomeration," Journal of Financial Economics, Elsevier, Elsevier, vol. 71(2), pages 315-347, February.
    3. Burkart, Mike & Panunzi, Fausto, 2001. "Agency Conflicts, Ownership Concentration, and Legal Shareholder Protection," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2708, C.E.P.R. Discussion Papers.
    4. Friedman, Eric & Johnson, Simon & Mitton, Todd, 2003. "Propping and tunneling," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 732-750, December.
    5. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
    6. Randall Morck, 2003. "Why Some Double Taxation Might Make Sense: The Special Case of Inter-corporate Dividends," NBER Working Papers 9651, National Bureau of Economic Research, Inc.
    7. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, Elsevier, vol. 58(1-2), pages 81-112.
    8. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(1), pages 172-204, February.
    9. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, American Finance Association, vol. 59(2), pages 537-600, 04.
    10. Raghuram G. Rajan & Luigi Zingales, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," NBER Working Papers 8178, National Bureau of Economic Research, Inc.
    11. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 26(4), pages 661-75, July.
    12. Randall Morck & Masao Nakamura, 1999. "Banks and Corporate Control in Japan," Journal of Finance, American Finance Association, American Finance Association, vol. 54(1), pages 319-339, 02.
    13. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(1), pages 1-39, October.
    14. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting Out Tunneling: An Application To Indian Business Groups," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 121-148, February.
    15. Randall K. Morck & David A. Strangeland & Bernard Yeung, 1998. "Inherited Wealth, Corporate Control and Economic Growth," William Davidson Institute Working Papers Series 209, William Davidson Institute at the University of Michigan.
    16. Istemi Demirag & Mehmet Serter, 2003. "Ownership Patterns and Control in Turkish Listed Companies," Corporate Governance: An International Review, Wiley Blackwell, Wiley Blackwell, vol. 11(1), pages 40-51, 01.
    17. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 1998. "Corporate Ownership Around the World," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1840, Harvard - Institute of Economic Research.
    18. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 748-761, May.
    19. Randall Morck & Bernard Yeung, 2003. "Family Control and the Rent-Seeking Society," William Davidson Institute Working Papers Series 585, William Davidson Institute at the University of Michigan.
    20. Marco Pagano & Ailsa Röell, 1998. "The Choice Of Stock Ownership Structure: Agency Costs, Monitoring, And The Decision To Go Public," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(1), pages 187-225, February.
    21. Alexander Aganin & Paolo Volpin, 2005. "The History of Corporate Ownership in Italy," NBER Chapters, in: A History of Corporate Governance around the World: Family Business Groups to Professional Managers, pages 325-366 National Bureau of Economic Research, Inc.
    22. Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004. "Corporate Governance, Economic Entrenchment and Growth," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
    23. Claessens, Stijn & Djankov^, Simeon & Fan, Joseph P.H. & Lang, Larry H.P., 2000. "The Costs of Group Affiliation: Evidence from East Asia," CEI Working Paper Series, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University 2000-5, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    24. Fernando Lefort & Eduardo Walker, 2000. "Ownership And Capital Structure Of Chilean Conglomerates:Facts And Hypotheses For Governance," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 3(1), pages 3-27.
    25. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(3), pages 325-351, June.
    26. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 867-891, 04.
    27. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, Elsevier, vol. 65(3), pages 365-395, September.
    28. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, American Finance Association, vol. 59(1), pages 65-105, 02.
    29. Perotti, Enrico C. & Gelfer, Stanislav, 2001. "Red barons or robber barons? Governance and investment in Russian financial-industrial groups," European Economic Review, Elsevier, Elsevier, vol. 45(9), pages 1601-1617, October.
    30. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, American Finance Association, vol. 57(6), pages 2741-2771, December.
    31. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
    32. Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Francesco Caselli & Nicola Gennaioli, 2013. "Dynastic Management," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 51(1), pages 971-996, 01.
    2. Giulio Cainelli & Donato Iacobucci, 2006. "The Role of Agglomeration and Technology in Shaping Firm Strategy and Organization," Working Papers, Fondazione Eni Enrico Mattei 2006.43, Fondazione Eni Enrico Mattei.
    3. Nasha Ananchotikul, 2008. "Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand," Working Papers, Economic Research Department, Bank of Thailand 2008-09, Economic Research Department, Bank of Thailand.
    4. Bennedsen, Morten & Nielsen, Kasper Meisner, 2010. "Incentive and entrenchment effects in European ownership," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(9), pages 2212-2229, September.
    5. Alvaro Cuervo-Cazurra, 2006. "Business groups and their types," Asia Pacific Journal of Management, Springer, Springer, vol. 23(4), pages 419-437, December.
    6. Cheung, Yan-Leung & Qi, Yuehua & Raghavendra Rau, P. & Stouraitis, Aris, 2009. "Buy high, sell low: How listed firms price asset transfers in related party transactions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(5), pages 914-924, May.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11368. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.