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Pyramidal Discounts: Tunneling or Overinvestment?*

Martin Holmen and Peter Högfeldt

International Review of Finance, 2009, vol. 9, issue 1‐2, 133-175

Abstract: Swedish families exploit the strong separation between ownership and control in pyramiding to establish control over several firms' internal cash flows via a very small capital investment. We establish that the discounts on the portfolio firms at the bottom of the pyramid as well as pyramid holding company are directly linked to costs from overinvestment that increase with the separation between ownership and control. In a financially developed economy where pyramids are transparent and the tax system regulates the flow of dividends within the pyramid and to shareholders, the primary cause of the discounts is not tunneling but overinvestment costs.

Date: 2009
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