The Emergence of Corporate Pyramids in China

Joseph P.H. Fan, T.J. Wongb and Tianyu Zhang

No 2006-3, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: We examine the pyramidal ownership structure of a large sample of newly listed Chinese companies controlled by local governments or private entrepreneurs. Both types of the owners use layers of intermediate companies to control their firms. However, their pyramiding behaviors are likely affected by different property rights constraints. Local governments are constrained by the Chinese laws prohibiting free transfer of state ownership. Pyramiding allows them to credibly decentralize their firm decision rights to firm management without selling off their ownership. Private entrepreneurs are constrained by their lack of access to external funds. Pyramiding creates internal capital markets that help relieving their external financing constraints. Our empirical results support these conjectures. Local governments build more extensive corporate pyramids when they are less burdened with fiscal or unemployment problems, when they have more long-term goals, and when their firm decisions are more subject to market and legal disciplines. The more extensive pyramids are also associated with smaller "underpricing" when the firms go public. Entrepreneur owners construct more complex corporate pyramids when they do not have a very deep pocket - as indicated by whether they are among the top-100 richest people in China.

Keywords: Pyramidal Ownership; Decentralization; China (search for similar items in EconPapers)
JEL-codes: D33 G32 G34 L22 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2006-08
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2006-3

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