The Corporate Pyramid Fable

Abstract

In many parts of the world, it is commonplace for wealthy families and successful entrepreneurs to parlay a relatively small financial investment into control of a sprawling corporate empire through the use of a pyramid-like structure in which they directly control a firm that owns a dominant stake in a company or companies with outside investors, which in turn controls other firms in the same manner and so on. In the United States, however, corporate pyramids are the exception to the rule. Why is this controversial business arrangement, stigmatized as a device economic elites use to disguise market power and manipulate government, largely absent from the U.S. corporate landscape? The conventional wisdom is that they were dismantled by New Deal policymakers who introduced in 1935 a tax on dividends paid to corporate shareholders. We show that this version of events is more fable than truth, relying primarily on a hand collected dataset drawn from filings made with the Securities and Exchange Commission between 1936 and 1938 by companies owning 10% or more of shares of companies registered with the Commission. We account for the rarity of corporate pyramids in the U.S. largely in terms of history, indicating that prior to the New Deal they were only ever extensively used in the utilities sector, where elimination of pyramidal structures was driven primarily by the Public Utilities Holding Company Act of 1935. Tax may have had an effect on corporate structure, but, at least in this instance, it was not the great leveller that the corporate pyramid fable would suggest.

Keywords: history of U.S. corporate structures, publicly traded corporations, Public Utilities Holding Company Act of 1935

JEL Classification: G30