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A Theory of Pyramidal Ownership and Family Business Groups

Author

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  • 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.

Suggested Citation

  • Heitor Almeida & Daniel Wolfenzon, 2005. "A Theory of Pyramidal Ownership and Family Business Groups," NBER Working Papers 11368, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11368
    Note: CF
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    References listed on IDEAS

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    Cited by:

    1. Nasha Ananchotikul, 2008. "Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand," Working Papers 2008-09, Monetary Policy Group, Bank of Thailand.
    2. Francesco Caselli & Nicola Gennaioli, 2013. "Dynastic Management," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 971-996, January.
    3. Bennedsen, Morten & Nielsen, Kasper Meisner, 2010. "Incentive and entrenchment effects in European ownership," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2212-2229, September.
    4. 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, vol. 33(5), pages 914-924, May.
    5. Giulio Cainelli & Donato Iacobucci, 2006. "The Role of Agglomeration and Technology in Shaping Firm's Strategy and Organization," ERSA conference papers ersa06p286, European Regional Science Association.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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