Pyramidal Ownership Research Articles

The Impact of Agency Problems on Corporate Performance in China

This paper delves into the intricate dynamics of the horizontal agency problem within the realm of corporate governance in China, scrutinizing the inherent conflict of interest between controlling and minority shareholders amidst a backdrop of concentrated ownership. Its core objective is to comprehensively grasp the repercussions of this agency dilemma on firm value and corporate performance. Central to this investigation is the identification and analysis of institutional features that fuel the agency predicament, notably the pre-existing split-share structure and the prevalent establishment of pyramid ownership arrangements. In response to these challenges, this study advocates for two primary approaches to mitigate the agency conundrum: an informal approach driven by cultural factors, particularly rooted in Confucian ethics, and a formal strategy entailing robust legal safeguards and regulatory frameworks. The potential efficacy of these proposed measures in ameliorating conflicts of interest, curbing unethical conduct, and fortifying the rights of minority stakeholders, all while reducing agency costs and enhancing corporate performance.

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.

Pyramidal Ownership and SOE Innovation

AbstractHow can state‐owned enterprises (SOEs) become more innovative in emerging economies where market competition emerges and state socialism remains? Rooted in a state socialism logic that traditionally prioritizes central planning, SOEs are increasingly challenged by a market competition logic espousing efficiency and innovation. We posit that the challenge, stemming from the grip of the state as the ultimate owner, may be mitigated for some SOEs under pyramidal ownership. A pyramid features SOEs being organized into chains of firms, creating indirect ownership and control through pyramidal layers. Such layers insulate state intervention in lower‐tier SOEs, loosening the grip of the state socialism logic and facilitating corresponding SOEs’ acceptance of the market competition logic, as reflected in more innovation. Leveraging a sample of SOEs in China, we find that SOEs innovate more when the number of pyramidal layers between them and the state increases. In addition, the innovation‐facilitating role of pyramidal ownership hinges on industry regulations and institutional development. Overall, this paper integrates research on institutional logics and pyramidal ownership to deepen our understanding of SOE innovation.

Related party transactions: Review of the literature

<p>Asian financial crisis has led many countries to perform related party transactions, which are transactions made by the firms to affiliated parties and often performed by controlling shareholders. The emergence of related party transactions cannot be separated from the existence of pyramidal ownership, where the controlling shareholder has several layers of ownership. Just as related party transactions can create a conflict of interest between the controller and the minority, the controller may transfer firms’ resources or assets to a parent entity that is not normally listed on a stock exchange. Therefore, in our paper, we would like to discuss about different aspects and arguments on the impact of related party transactions. Prior studies provide various contributions, as one argues that related party transactions are part of an efficient contract, where the two connected parties have better information with each other due to the connection than the unaffiliated parties. On the other hand, several studies suggest that related party transactions have a bad impact and are full of expropriation of minority interests.</p>

Pyramidal Ownership and Company Value: Evidence from Polish Listed Companies

This paper examines the effects of pyramidal ownership. Using the sample of 162 non-financial companies listed on the Warsaw Stock Exchange during the period 2010-2014, we verify the relation between the adoption of a pyramidal structure and company value. Specifically, we show that the link between pyramidal ownership and company value is more complex than previously thought addressing the aspect of ownership concentration and dual class shares. Our results indicate that the use of pyramids is associated with a higher value measured by Tobin’s Q, supporting the efficient monitoring hypothesis. Contrary to our expectations the combination of pyramidal ownership and dual class shares is correlated with lower Q. Finally, while the adoption of a pyramid by a majority shareholder does not impact firm value, the combination of a pyramid, ownership concentration and dual class shares is associated with higher Q. This finding suggests that the blockholder ownership outweighs the possible cost of excessive disproportionate ownership and that pyramids and dual class shares have different effects on company value.

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.

International diversification and performance in family firm: Exploring nonlinear relationships with the governance structure in an emerging economy

ABSTRACT In this study, we researched the relationship between international diversification and performance in family firms in an emerging economy. Likewise, from the perspective of the governance structure, we investigated non-linear relationships between business group membership, concentration of ownership as well as pyramid ownership with the performance of internationally diversified family firms. Considering a sample of 83 companies that have been listed on the Santiago de Chile Stock Exchange during the period between 2003 and 2013, we find an inverted U relationship between international diversification and performance; a U relationship between international diversification and performance in family firms; an inverted U relationship between the performance of internationalised family firms and affiliation to a business group; a U relationship between the performance of internationalised family firms and concentration of ownership; and a non-linear relationship in the inverted U form between the performance of internationalised family firms and high divergence between control and cash flow rights and U in the case of low divergence.

Controlling Shareholder Ownership Structure and Conflict-Related Party Transactions

Concentrated companies offer various types of shareholding structures either direct, indirect, or pyramidal ownership. The opportunist controlling shareholders may intend to utilize the complex nature of indirect and pyramidal shareholding to engage in related party transactions (RPT) by concealing or hiding their related party identity. We examine the association between controlling shareholder’s shareholding structure (direct shareholding (DCS), indirect shareholding (INDCS), and pyramid shareholding (PYRCS)) and RPT in Malaysia. Based on a sample of 580 companies listed on Bursa Malaysia from 2013 to 2017, we found that the controlling shareholders utilize all types of shareholding (DCS, INDCS, and PYRCS) to engage with RPT. These findings support the argument that the controlling shareholder is at the privilege to manipulate the various type of shareholding to get personal benefit through RPT. The findings also indicate that controlling shareholders with INDCS or PYRCS disclose a lower magnitude of RPT-conflict rather than controlling shareholders with DCS. We provide an important implication for capital market regulators to strengthen approval procedures or guidelines for RPT, especially upon the concentrated ownership. Also, regulators such as the MSWG may increase minority shareholder’s awareness of the possibility of conflict-RPT behind the RPT among related party companies. The findings might be helpful for users to understand the relationship between controlling shareholders and RPT in other developing countries with similar governance and culture attributes to Malaysia. Keywords: Related party transaction, ownership, controlling shareholder, personal benefit, pyramidal ownership.

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.

International diversification, ownership structure and performance in an emerging market: evidence from Chile

This research analyzes the impact of international diversification on the performance of Chilean exporting firms. Considering a sample of 47 companies listed on the Santiago Stock Exchange during the period 2003–2013, we found an international diversification discount. Secondly, when investigating the relationship between international diversification and performance, we found that they are related through an inverted U curve. Finally, we investigated how the ownership structure moderates the relationship between international diversification and performance, finding that the ownership concentration and pyramidal ownership positively impacts the performance of companies initiating international diversification strategies; and that the business groups’ affiliation negatively impacts in the international diversification-performance relationship.

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.

Internal capital markets, ownership structure, and investment efficiency: Evidence from Taiwanese business groups

This study uses a unique data set to thoroughly investigate how the financing provided by a business groups' internal capital markets and control-enhancing ownership structure relate to investment efficiency. We find that group-affiliated firms that make more intensive use of related-party transactions that facilitate an internal capital market exhibit a reduced probability of under-investment. We also find that pyramidal (cross) ownership improves (weakens) investment efficiency suggesting different types of control-enhancing structure have strongly contrasting effects on investment efficiency. These findings reveal both the financing advantages and disadvantages of business groups.

Identifying Ultimate Controlling Shareholders In Indonesian Public Companies: an Empirical Survey

This paper aims to identify the ultimate ownership of public companies that are listed on the Indonesia Stock Exchange (IDX) during 2014-2017 period. Identification techniques used in this study are: (1) tracking the ownership structure; (2) measuring the level of control; (3) determining the majority ownership, and (4) finding the ‘controlling shareholder’ narrative in the annual report. Based on tim research analyze, this paper found that the ultimate ownership of public companies in Indonesia 2014-2017 was concentrated in the ultimate family owners (54.43%), corporations (31.05%) and the state (7.49%). Beside it, 89.43% of families use the indirect ownership structure (pyramid ownership). In addition, more than 50% of the ultimate family ownership place their family members in the Board of Commissioner (BOC) and Board of Directors (BOD).

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.