On the Determinants of Pyramidal Ownership: Evidence on Dilution of Minority Interests

Abstract

We investigate the determinants, costs and benefits of corporate affiliation to pyramidal holdings. We find that there is a mismatch between cash flow rights and voting rights in firms affiliated to pyramidal holdings, and that corporate policies reflect cash distribution preferences of the ultimate owners. We also find a permanent depressive effect of pyramidal ownership on corporate value. This finding is consistent with the hypothesis that the layers of equity holdings within the pyramidal holding contribute to form an impervious veil behind which ultimate owners engage in expropriating behavior. Our investigation of affiliated firms suggests that ultimate owners, mostly families, are adept at combining their cash flow rights, voting power, and distance from affiliates in a way that minimizes sensitivity to negative events and maximizes sensitivity to positive events.

Keywords: Pyramidal holdings, expropriation, corporate governance, corporate policies

JEL Classification: G32