The purpose of this research is to explore the motivation of business group firms
to adopt pyramidal ownership structures. The traditional approach claims that pyramids
are useful in tunneling resources to other affiliates by transferring value to firms with
high cash flow rights of controlling shareholders. Using a unique dataset of 7,180
Ecuadorian firms, I analyze the transmission of profits' shocks among group firms to
assess the existence and the amount of tunneling. The comprehensive ownership
information allows me to identify pyramidal and horizontally owned group firms
separately and better understand the nature of their ownership structure. The results
provide support for the existence of tunneling in Ecuadorian business groups. About
70% of the profits of the average group firm are transferred to another affiliate, although
only half of this money shows up on its books.
An alternative explanation for the flow of money among group firms is the
existence of internal capital markets to substitute for imperfections in the external
market. I test this hypothesis by comparing the impact of cash flow availability in the
investment decision of group firms with that of stand-alone firms. Group firms' cash
flow to investment sensitivity appears to be only half of the value for comparable standalone
firms. Moreover, group liquidity is also a determinant of the average group firm's
investment, especially for pyramidal firms. The analysis sheds light on the nature of business groups in Latin America, their
ownership patterns, and their resource allocation decisions.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/ETD-TAMU-2009-05-777 |
| Date | 16 January 2010 |
| Creators | Granda Kuffo, Maria L. |
| Contributors | Wiggins, Steven |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation |
| Format | application/pdf |
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