Pyramidal Ownership and the Creation of New Firms

69 Pages Posted: 23 Sep 2010 Last revised: 5 Sep 2012

See all articles by Jan Bena

Jan Bena

University of British Columbia - Sauder School of Business

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Date Written: September 4, 2012

Abstract

We study the role of pyramidal ownership structures in the creation of new firms. Our results suggest that pyramids arise because they provide a financing advantage in setting up new firms when the pledgeability of cash flows to outside financiers is limited. Parent companies supply inside funds to new firms which, due to large investment requirements and low pledgeable cash flows, cannot raise enough external financing. The financing advantage of pyramidal structures is pervasive in many countries, exists regardless of whether new firms are set up by business groups or by smaller organizations, and is an important underpinning of entrepreneurial activity.

Keywords: Ownership pyramids, Parent companies, Startups, New firms, Access to capital

JEL Classification: G30, G32, G34

Suggested Citation

Bena, Jan and Ortiz-Molina, Hernan, Pyramidal Ownership and the Creation of New Firms (September 4, 2012). Available at SSRN: https://ssrn.com/abstract=1681184 or http://dx.doi.org/10.2139/ssrn.1681184

Jan Bena

University of British Columbia - Sauder School of Business ( email )

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Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Canada
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