Pyramidal Ownership Structure Research Articles

Information asymmetry, corporate governance, and IPO underpricing: Evidence in Indonesia

This paper analyzes the relationships between information asymmetry, corporate governance, and IPO underpricing in the Indonesian IPO market. Previous studies on underpricing IPO have shown mixed results, offering several interesting research gaps to explore, especially in emerging markets. Accordingly, the purpose of the research is to examine further whether information asymmetry and corporate governance are the causes of IPO underpricing. A purposive technique is used, and 318 samples of IPOs are selected from 2010 to 2020 on the Indonesian Stock Exchange (IDX). Next, a multiple regression model is developed and tested using the EViews 9 software. Our evidence shows that underwriter reputation negatively affects IPO underpricing, indicating a high level of information asymmetry in the Indonesian IPO market. Further, our evidence reveals that board size and number of employees negatively affect IPO underpricing. Meanwhile, manager and family ownership exhibit insignificant results due to the pyramidal ownership structure. Finally, we also find that reputable underwriters charge higher underwriting fees than non-reputable ones. In general, our study demonstrates that hiring a reputable underwriter and implementing good corporate governance practices can minimize underpricing during the IPO.

The impact of ownership structure and corporate governance on energy intensity: evidence from Indian business groups

PurposeEnergy efficiency is critical for global sustainability (International Energy Agency, 2019). The purpose of this paper is to examine how agency conflicts arising from pyramidal ownership structures impact the energy intensity (EI) of group-affiliated Indian firms. Group-affiliated firms face unique governance challenges. For instance, parent owners (promoters) may transfer profits from one group-affiliated firm to another firm in which they have greater ownership. The authors hypothesize that such governance issues will lead to underinvestment in energy-saving projects among group firms in which promoters have a low ownership stake, resulting in their greater EI.Design/methodology/approachThe authors measure EI as the ratio of total energy expense to total sales revenue (EI) and as the industry-adjusted version of this ratio. Group-affiliated Indian firms are divided into high- and low-stake firms based on the sample’s median promoter ownership.FindingsResults support the authors’ prediction: group firms in which promoters have low ownership are more energy intensive, consistent with these firms being exposed to greater governance challenges and agency conflicts that result in operating inefficiencies and/or underinvestment in energy-saving projects.Practical implicationsGiven energy efficiency will be key in addressing climate change, this study could raise awareness among activists, motivate regulators to consider agency problems among group-affiliated firms in emerging markets and may underscore the importance of environmental-related corporate disclosures.Originality/valueTo the best of the authors’ knowledge, this study is the first to identify the significant impact that firm ownership structure and associated governance challenges have on corporate EI.

R&D investment decisions in business groups: Evidence from a natural experiment

AbstractResearch Question/IssueThis paper examines R&D investment decisions in firms under a pyramidal ownership structure in the context of South Korea.Research Findings/InsightsUsing the Monopoly Regulation and Fair Trade Act, which places limits on group affiliates' equity investments, we provide new evidence that controlling owners tend to increase long‐term R&D expenditures more in firms that are largely subject to the equity investment regulation in South Korea. Moreover, this result is more significant for firms for which the owners have low cash‐flow rights, firms located in the lower layers of the pyramid, and firms that hold less equity shares than do other group affiliates.Theoretical/Academic ImplicationsThis study contributes to the literature that focuses on R&D investment decisions by providing empirical support regarding how firms' relative status within their business group influences the firms' R&D investment decisions in South Korea.Practitioner/Policy ImplicationsThis study provides important insight into the positive policy implications of the equity investment regulation on R&D investments for Korean business groups.

The effect of affiliation structure on the performance of pyramidal business groups

Empirical research concerning business groups has documented the effects of group size and diversification on group-level performance. We argue that these effects are contingent on the group affiliation structure and occur through the following two mechanisms: connectedness and risk-sharing. We tested for moderation effects in a panel dataset of 127 pyramidal business groups in Brazil during the period from 2001 to 2015. We found that while the number of corporate layers in the pyramidal ownership structure positively moderates the effect of size on group-level performance, the concentration of affiliates in the first layer shows a negative moderation. We also demonstrated that limited diversification in the first corporate layer reduces the effect of size on group-level performance.

PYRAMIDAL OWNERSHIP STRUCTURE AND CASH FLOW WEDGE: EVIDENCE FROM FAMILY BUSINESS GROUPS OF PAKISTAN

This study examines the ownership structure and cash flow wedge of ultimate controlling owners in firms affiliated with family business groups of Pakistan. The study uses unique handpicked data comprising a sample of 181 group affiliated, 112 stand-alone, 21 foreign, and 12 state owned non-financial firms listed on Pakistan Stock Exchange for a period of 2008-17. The study finds high degree of ownership concentration particularly in 53 family business groups. The study also finds that controlling shareholders own over 20 percent shareholdings in 60 percent of all sample firms and families own 50 percent or more shareholdings in 44 percent of group affiliated firms. The novel contribution of this study is to systematically identifying the ownership affiliation of all family business groups, developing the pyramidal ownership structure of prominent family businesses and finding the difference in voting and cash flow rights which creates significant wedge for controlling family owners. This has strong implications for regulators to ensure effective implementation of regulations as well as minority shareholders and dispersed investors for cognizant investment decision making.

Corporate fraud under pyramidal ownership structure: Evidence from a regulatory reform

This paper explores a causal relationship between firms' ownership structures and the likelihood of corporate fraud. We document that central firms that control the business group tend to commit corporate frauds related to unlawful intragroup trades (collusive activities and unfair transactions). Following South Korea's 2001 regulatory reform that imposes a ceiling on firms' total amount of shareholding of domestic companies, the frequency of corporate frauds was reduced more in central firms than in non-central firms as the controlling owner's cash-flow rights dropped more in central firms. These results suggest that controlling owners commit frauds to pursue their private benefit.

Influence of Social Identity on Family Firms’ FDI Decisions: The Moderating Role of Internal Capital Markets

This paper examines the foreign direct investment (FDI) decision by family firms from an emerging economy, China. Despite the increasing attentions to family firms’ FDI, extant research has focused largely on the comparisons between family firms and non-family firms with inconsistent findings. Limited research effort has been devoted to the heterogeneous FDI among family firms. We investigate how different family firm types affect its FDI. Family firms differ in the identity of family owners due to their variation in the trade-off between preserving family’s socioemotional wealth (SEW) and maximizing firm economic goals. Family owners with different identities will behave differently in their FDI decisions. We find that family firms owned by a lone founder (i.e., lone-founder firms) who perceives himself more as an entrepreneur, have higher propensity and intensity of FDI than those owned by multiple family members (i.e., family-controlled firms) who share the identity of family guardians. Moreover, we find that the positive effect of lone-founder on family firms’ FDI decisions is stronger when they have adequate access to internal capital markets through pyramidal ownership structure or financial slack. Overall, this paper enhances our understanding of family firms’ FDI decisions and offers an explanation for prior inconclusive findings on this important area by highlighting the effect of huge heterogeneities among family firms on their FDI decisions.

Government Ownership in the Middle East and North Africa

Our study investigates the impact of government ownership on firm performance in the MENA region. While extant studies have presented mixed findings with diverse samples from developed or developing countries, state-owned enterprises in the Middle East and North Africa (MENA) region have received little attention despite their substantial scale. Based on a sample of 1215 MENA firms from year 2010 to 2017, we examine the relationship between government ownership and firm performance. Furthermore, we unpack this relationship by scrutinizing the moderating roles of pyramid ownership structure and government identity (domestic vs. foreign). We find that government ownership enhances firm performance in the MENA region. However, the advantages of government ownership diminish if such state-owned enterprises have lengthy control chains or foreign identity.

Pyramidal Ownership Structure and Firms’ Audit Fees

ABSTRACT Using the sample of listed firms in China from 2004 to 2014, this paper investigates the impact of pyramidal ownership structure on firms’ audit fees. The results show that (1) generally, the greater the number of pyramidal layers, the more audit fees the firm pays; (2) compared with non-state-owned firms, this relationship is weaker in state-owned firms. Additional tests show that the number of pyramidal layers has a stronger impact on audit fees in firms whose voting rights and cash flow rights are separated. However, CEO duality and management ownership do not affect this relationship. Moreover, in state-owned firms, the positive relationship between the number of pyramidal layers and audit fees only exists in those firms whose ultimate controllers’ administrative level is lower. This paper expands the studies on the consequences of pyramidal ownership structure and introduces shareholding structure into the research on determinants of audit fees.

Pyramid ownership structure and tax avoidance among Canadian firms

PurposeThis paper aims to examine the relationship between pyramid ownership structure and tax avoidance.Design/methodology/approachThis paper is an empirical work using a sample of Canadian listed firms.FindingsRelying on several proxies for tax avoidance, the authors find that firms affiliated with pyramidal structures generally engage in more tax avoidance activities than non-affiliated firms; firms affiliated with more complex pyramids engage in more tax avoidance practices and firms located at the lower tiers of the pyramids avoid more taxes; and some pyramid-affiliated firms with larger deviation between controlling shareholders’ cash flow rights and control rights engage in more tax avoidance practices.Social implicationsA broader understanding of the relationship between pyramidal structure and tax avoidance can be pursued by including firms in other countries, where the pyramid groups (pyramid structure) are prevalent, but institutional environments differ from that of Canada.Originality/valueThis study highlights the importance of pyramid ownership in shaping tax avoidance activities among Canadian-listed firms. Canada provides an ideal setting for studying the impact of ownership structure, as it contains a diverse corporate ownership structure ranging from widely held freestanding firms to pyramidal business groups.

Owner type, pyramidal structure and R&D Investment in China’s family firms

Drawing on socioemotional wealth perspective and agency theory, this paper holds that lone-founder firms tend to engage more actively in R&D projects than do family-controlled firms involving multiple family members as owners, while family ownership structure moderates that effect. Using a large sample of 5808 firm-year observations in China, the study found that lone-founder firms do more R&D than family-controlled firms, though the positive effect is less pronounced when founder’ ownership is higher and more pronounced when the divergence between founders’ ownership and control (resulted from pyramidal structures) is higher. These findings indicate that properties of family ownership structure, and particularly pyramidal ownership structure, are important contingencies of family firms’ R&D decisions. This yields implications for family business and researchers, as well as policymakers seeking to encourage innovativeness in the large family business sector.

Spillover Effects of Capital Expenditure Announcements Within Business Groups

AbstractUsing the capital expenditure announcements of Taiwanese business group affiliated firms, this study examines whether the group diversification and ownership structure influence intragroup spillover effects. We find that the stock price reactions of the announcing firms are positively associated with both the stock price reactions and the post‐announcement long‐term performance of their non‐announcing group peers. More importantly, the evidence shows that this positive spillover effect weakens for business groups associated with a pyramidal ownership structure. The evidence supports the conjecture that principal–principal conflicts play an important role in moderating the spillover effects in a business group. The findings further show that the spillover effects are stronger during periods of financial crises. Finally, in the 3‐year period following announcements, the non‐announcing group members experience declining industry‐adjusted performance.

The impact of ownership structure on conditional and unconditional conservatism in China: Some new evidence

This study investigates the relationship between ownership structure and conditional and unconditional conservatism in China's unique corporate setting. It finds an inverted U-shaped association between state ownership and unconditional conservatism, with an inflection point of 31%. However, the results provide mixed support for a U-shaped relationship between state ownership and conditional conservatism. Moreover, the level of unconditional conservatism tends to be higher in listed firms with a more complex pyramidal ownership structure, but lower in listed firms with greater foreign ownership. In addition, in line with the incentive alignment view of LaFond and Roychowdhury (2008), this study finds that managerial ownership is negatively correlated with both conditional and unconditional conservatism. Overall, I provide new evidence on how accounting conservatism can be affected by certain ownership and control features in the context of concentrated state ownership and complex pyramidal ownership structure.

Complex Pyramid Structure, Judicial Efficiency and Firm Performance A Comparative Analysis of Chinese and Pakistani Listed Companies

This study explores the association between the complex pyramid ownership structure and firm’s market performance at Chinese and Pakistani firms, and the effect of efficient judiciary on this relationship. Previous studies report that Pakistani pyramidal firms have complex ownership structure, which motivate us to study the effect of complex pyramid structure on the performance of Chinese and Pakistani firms.We use a sample of non-financial Chinese and Pakistani firms for the period 2010-2017. Results show that pyramid structure at Pakistani firms is more complex than at Chines firms, and that control layers and control chains have negative association with performance. However, in chines pyramidal firms the control layers have negative association with firm’s performance while control chains have no association with firm’s performance, we find that efficient district courts moderate the negative effect of control layers and control chains on the dividend payout. Our results show that in the presence of inefficient courts the minority investor rights have insignificant effect on the relationship of complex pyramid structure and firm’s performance.

Ultimate parent's board reform and controlling shareholder entrenchment: Evidence from a quasi-natural experiment in China

This paper examines whether the strengthening of board monitoring at the level of the ultimate parent company reduces their expropriation from the listed subsidiaries. Using a quasi-natural experiment in China, we find that a high presence of outside directors on the ultimate parent company significantly reduce the parent company's tunneling from listed subsidiaries. Furthermore, the ultimate parent's board monitoring in reducing the tunneling is more salient when the ultimate parent company has strong management control in listed subsidiaries and complicated pyramid ownership structure in the listed subsidiaries.

The dark and bright sides of agency problems: Evidence from insider compensation of family pyramidal firms

Most research on agency problems focuses on the entrenchment of minority shareholders in the forms of excess executive compensation, unfair transactions among related parties, etc. (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 2000; Shleifer & Vishny, 1997). This paper investigates how insiders’ compensation is impacted based on the types of agency problems. In particular, we examine if the positive association between agency problems and excess compensation reverses due to reputation effects. Specifically, controlling shareholders are inclined to curb on insider compensation to avoid disciplinary action by outsiders when investors are more likely to be aware of exploitation problems arising from severe agency problems.This study finds that the presence of pyramidal ownership structures, which are traditionally deemed as entrenchment mechanisms over minority shareholders, decreases pay-performance sensitivity only in non-family firms. In contrast, pyramidal ownership and higher control-ownership deviation reduce insider compensation in family firms. Namely, compensation serves as a commitment mechanism with the combination of family ownership and control-enhancing mechanisms. Moreover, prior studies argue that management compensation is lower in family firms compared with non-family firms, we find the results do not hold after controlling for the control-enhancing mechanisms.

Audit committees and systematic risk: Evidence from Taiwan’s regulatory change

This study examines the changes in the systematic risk of firms listed in the Taiwan stock market following the initial establishment of audit committees. While the results show that the changes in systematic risk are insignificant for the overall sample of firms, I do find that corporate governance influences the changes in systematic risk for the low-growth firms. Specifically, the low-growth firms with lower insider shareholdings, with a pyramidal ownership structure, not controlled by a family, or audited by one of the Big 4 accounting firms tend to enjoy the benefits of experiencing a decline in systematic risk following the establishment of the audit committee.

The impact of pyramid ownership on earnings management

PurposeUnlike firms listed in the USA, many large firms in Canada belong to business groups organized as pyramids. A pyramidal structure refers to a business group that consists of a set of enterprises or other entities and displays a top-down chain of control. The purpose of this paper is to investigate the relationship between pyramid ownership and earnings management.Design/methodology/approachThe paper is an empirical study using a sample of 165 Canadian listed firms from 2010 to 2015. The impact of pyramid ownership on both accrual-based and real earnings management is examined.FindingsThe findings show that pyramid-affiliated firms engage in less accrual-based and real earnings management than non-pyramid-affiliated firms. The results further show that the divergence between control rights and cash flow rights of the controlling shareholders in the pyramid-affiliated firms is positively related to real earnings management. Moreover, the results highlight that intra-group transactions (other than internal financing) among pyramid-affiliated firms lead to higher level of both accrual-based and real earnings management, but internal financing is negatively associated with real earnings management. Overall, this study provides the evidence which indicates that pyramid ownership structure and earnings management are related to each other.Originality/valueThe paper contributes to the earnings management literature by studying the impact of pyramid ownership structure on earnings management, especially real earnings management.

The Effect of Pyramidal Ownership Structure to the Financing Policies and Firm Value in Indonesia: Cronyman as Moderating Variable

The research to examine the effects of ownership structures on financing policies and firm valuation. The populations are all listed companies in Indonesia Stock Exchange for period of 2013 and 2015. The sample selection technique used purposive sampling and resulting in a final sample of 72 listed firms. Empirical tests are conducted using multiple regressions and two stages least squares regression to test the simultaneous relationship between ownership structure, financing policies and firm value. The estimated results provide support for the hypotheses proposed that the separation of cash flow rights and control rights have led the use of excess leverage among pyramidal companies to preserve ultimate owner’s control. However, we failed to find a significant relationship between firm’s leverage and firm’s value. The conclusion is the simultaneounity relation between ownership structure, leverage and firm value appear that only the ownership structure significantly related with leverage and firm value. Also firm value and leverage ownership impact the ownership structure. Meanwhile, leverage does not appear to have a significant relation with the firm value, or the other way around.

Corporate governance, pyramid ownership, and firm value: Evidence from Vietnam

This paper examines the relation among corporate governance practices, pyramid ownership structure, and firm value by using a sample of Vietnamese listed firms. Using a sample of 103 non-financial firms listed on HOSE for the period from 2012 to 2014, and employing two-stage least square regression (2SLS) to deal with potential endogeneity, we find that some indicators, commonly adopted as a key components of corporate governance, such as size or independence of board of directors, are imperfect proxies for corporate governance practices. Our results indicate that it is better to employ a corporate governance index (CGI), including 117 criteria developed by Connelly, Limpaphayom, and Nagarajan (2012) since it allows for more comprehensive estimation of corporate governance. More interestingly, our results show that the pyramid ownership plays an important role in the effect of corporate governance on firm value. The results are consistent regardless of whether companies have high or low family ownership.