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Description:
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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 . |