Family Business Groups Around the World: Costs and Benefits of Pyramids

Abstract

Using a comprehensive dataset of 28,039 firms in 45 countries, this study investigates the motivations for family-controlled business groups, focusing on the question of how such groups are able to attract minority shareholders and allay their concerns about being expropriated. We argue that minority shareholders co-invest with group controlling owners because group structures play critical roles in financing projects that might not be otherwise funded by external investments, especially in underdeveloped capital markets. Our analysis offers support for this argument and provides new insight into how the balance of costs and benefits of group affiliation varies both within the pyramidal structure of a group and across investment environments. At the country level, we find that restricted access to external capital is associated with a greater prevalence of family business groups. Within individual groups, we find evidence consistent with funding advantages that pyramid structures offer: among group members, firms at the bottom of a pyramid receive the greatest internal capital support. In particular, internal equity funding, investment intensity, and firm performance all increase down a pyramidal chain. Comparing group affiliates and independent firms, we find that the former is associated with a valuation discount, which is consistent with evidence from prior studies. However, controlling for endogeneity in group affiliation shows that certain firm types benefit from business group membership. Overall, our results highlight that in addition to the well-documented control motivations behind pyramidal groups, these structures also provide important funding and certification support to members firms.