Abstract
Abstract This paper examines the effects of the pyramid inner ownership structure of companies on capital structure in an emerging market economy country. The author uses firm-level panel data of Chinese listed companies to analyze the effects of the inner structure of pyramid on capital structure, and the differences in those effects between regions with different institutional environments. The results indicate that the longer the layers of a pyramid structure, the stronger its ‘leverage effect’, as well as the ultimate owner’s motivation to expand debt financing. Thus the layers of pyramid structure have a significantly positive effect on capital structure. However, the chains within a pyramid structure have no significant effect on capital structure. Compared with regions with poor institutional environment, in regions with a better institutional environment the effect of the layers of pyramid structure on capital structure becomes smaller.
Highlights
Previous research has shown that pyramid structure is very common in companies around the world(La Port, Lopez-De-Silanes & Shleifer, 1999;Claessens, Djankov & Lang, 2000)
The chains of pyramid structure have no significant impact on capital structure
This paper investigates the effect of the inner structure of pyramid on capital structure and the differences of that effect among areas with different institutional environments
Summary
Previous research has shown that pyramid structure is very common in companies around the world(La Port, Lopez-De-Silanes & Shleifer, 1999;Claessens, Djankov & Lang, 2000). Previous studies on the relationship between ultimate controller and corporate financing, is carried out from the perspective of ultimate controller’s controlling rights, cash flow rights and the separation between the two(Bunkanwanicha, Gupta & Rokhim, 2008; Bany-Ariffin, Mat & McGowan, 2010). The separation between ultimate controller’ controlling rights and cash flow rights is just the result led by the pyramid structure. Extant research neither explored the impact of the inner structure of pyramid on capital structure, nor taken the external institutional environment into consideration. This paper investigated the effects of the inner structure of pyramid on capital from both the vertical and horizontal dimensions, and examined the differences under different institutional environment. By computing the number of layers between ultimate controllers and listed companies, we tested the impact of the inner vertical structure of pyramid. While in the horizontal dimension, we focused on the number of chains taken by the ultimate controllers to control the listed companies
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