Pyramidal Ownership in Ecuadorian Business Groups

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Title: Pyramidal Ownership in Ecuadorian Business Groups
Author: Granda Kuffo, Maria L.
Abstract: 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 .
URI: http : / /hdl .handle .net /1969 .1 /ETD -TAMU -2009 -05 -777
Date: 2010-01-16

Citation

Pyramidal Ownership in Ecuadorian Business Groups. Available electronically from http : / /hdl .handle .net /1969 .1 /ETD -TAMU -2009 -05 -777 .

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