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A Theory of Pyramidal Ownership and Family Business Groups


Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Daniel Wolfenzon


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

May 2005



Abstract:     
We provide a rationale for pyramidal ownership (the control of a firm through a chain of ownership relations) that departs from the traditional argument that pyramids arise to separate cash flow from voting rights. With a pyramidal structure, a family uses a firm it already controls to set up a new firm. This structure allows the family to 1) access the entire stock of retained earnings of the original firm, and 2) to share the new firm's non-diverted payoff with minority shareholders of the original firm. Thus, pyramids are attractive if external funds are costlier than internal funds, and if the family is expected to divert a large fraction of the new firm's payoff; conditions that hold in an environment with poor investor protection. The model can differentiate between pyramids and dual-class shares even in situations in which the same deviation from one share - one vote can be achieved with either method. Unlike the traditional argument, our model is consistent with recent empirical evidence that some pyramidal firms are associated with small deviations between ownership and control. We also analyze the creation of business groups (a collection of multiple firms under the control of a single family) and find that, when they arise, they are likely to adopt a pyramidal ownership structure. Other predictions of the model are consistent with systematic and anecdotal evidence on pyramidal business groups.

Number of Pages in PDF File: 50

Keywords: pyramids, business groups, family firms, investor protection, ownership structure, dual-class shares.

JEL Classification: G32

working papers series


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Date posted: May 17, 2005  

Suggested Citation

Almeida, Heitor and Wolfenzon, Daniel, A Theory of Pyramidal Ownership and Family Business Groups (May 2005). Available at SSRN: http://ssrn.com/abstract=721801 or http://dx.doi.org/10.2139/ssrn.721801

Contact Information

Heitor Almeida (Contact Author)
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Daniel Wolfenzon
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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