The Impact Of Pyramidal Structure On Investment Of Private Firms

Since the last decade of20thcentury, with the market-oriented reforms in China’sstate-owned enterprises and fast development of private firms, business conglomeratebecome a common phenomenon in China. And conglomerates always apply pyramidalownership structures. The modern property rights theory holds that the optimal structureof property rights is to match the residual claim and residual rights of control. Under thepyramidal ownership structure, actual controller at the top tier always use less cash flowto obtain greater control over the underlying listed companies, which generatesseparation of cash flow rights and control over listed companies. Such separation canresult in serious agency problems. Throughout the world, we find that most companiesare subject to pyramidal ownership structure.This article follows research idea of “what-why-how” to study the pyramidalownership structure of private listed companies in China.According to analysis, we find that the majority of private firms in China aresubject to pyramidal ownership structure. The reasons are as follows. First, manyprivate firms face financing difficulties so that they establish conglomerates to easefinancing pressure. Second, the reform of shareholder structure of listed companies inChina supply private firms with an opportunity to realize the establishment of pyramidalownership structure. After that, we analyze the influence of pyramidal ownershipstructure to investment of private firms. We select sample of private listed companies in2008-2010. The results show that the degree of underinvestment of pyramidal privatefirms is greater than that of non-pyramidal private firms, and free cash flow can easeunderinvestment in some degree; moreover, the degree of overinvestment of pyramidalprivate firms is larger than that of non-pyramidal private firms in some degree, and freecash flow can aggravate overinvestment.