Pyramidal Ownership and the Creation of New Firms
69 Pages Posted: 23 Sep 2010 Last revised: 5 Sep 2012
Date Written: September 4, 2012
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: Suggested Citation