The Function Of Multi-levels Internal Capital Market In Pyramidal Business Group

A large part of Chinese conglomerates have pyramid-shaped ownership structure, and the listed company is a member of the whole group.In the whole pyramidal business group, the listed parent company focuses on capital allocation and strategic development, the subsidiaries operates actual business. The difference of the positioning leads to the upper internal capital market formed by listed parent company and big shareholders and the lower internal capital market formed by listed parent company and subsidiaries have different forms of capital allocation, then their function is also different.Existing research on internal capital market only focuses on the internal capital market between listed parent company and big shareholders or listed parent company and other companies controlled by big shareholders. For pyramid structure, capital allocation and the function of internal capital market between the listed parent company and its subsidiaries don’t have sufficient attention, which will seriously affect the understanding of the internal capital market inside the pyramid structure. Therefore, this paper will study the function of multi-level internal capital market in pyramidal business group.Firstly, this paper fully reviews existing foreign and domestic research results on the internal capital market and analyzes the theoretical foundation of multi-level internal capital market in pyramidal conglomerates. Then take China Guodian Corporation as an example, choose the related transactions from2008to2012, analyze the function of the upper and lower internal capital market.This study shows that:(1) internal capital market in pyramidal conglomerates has multiple levels, the function and operation is different between the upper internal capital market formed by listed parent company and big shareholders and the lower internal capital market formed by listed parent company and subsidiaries.(2) Upper level focuses on creating group financing vehicles to optimize capital allocation.(3) Lower internal capital market pays attention to improve liquidity of daily business operations and investment in subsidiaries.(4) Upper and lower levels of internal capital market are connected by the middle enterprises, they realize the function supplementary and influence each other.Innovation of this paper is that it based on the background that more and more conglomerates use pyramid structure, by comparing capital-allocation in the upper and lower internal capital market, analyze the function of different levels of internal capital market. This study provides a new perspective to investigate the function and operation of the internal capital market in the pyramidal structure, as well as supplies theory support to the operation of internal capital market in a conglomerate.