Pyramidal Structure of Chinese Publicly-Listed Private Firms: Motivations, Correlations and Paths to Governance*

Han Zhongxue (韩忠雪) and Li Weian (李维安)
Research Institute of China Corporate Governance, Business School, Nankai University, Tianjin, China

 
Abstract: It is generally believed in academia that there are two theoretical explanationsof tunneling and financing advantage for the creation of pyramidal structure. However, there is no definitive conclusion on which explanation holds sway. Based on non-equilibrium panel data of seven years between 2004 and 2010, this empirical study uses the product market competition variables of “inter-sector competition” and “intra-sector competition”and the hierarchy and complexity of pyramidal structure, examines the correlation between pyramidal structure of Chinese private manufacturing listed firms and product market competition and patterns of change, and reveals the major causes of pyramidal structure. Empirical result indicates that, for Chinese private manufacturing listed companies, there is a significant negative correlation between product market competition and the hierarchy and complexity of pyramidal structure, which indicates that the creation of pyramidal structure has a preference on tunneling by controlling shareholders. On the basis of further considerations on corporate tunneling and financing restraint categorization, high-tunneling firms and firms with low financing restraint demonstrate significant tunneling motivations; low-tunneling firms and firms with high financing restraint demonstrate significant effect of financing advantage, which further testifies both theoretical explanations for the creation of pyramidal structure. Conclusions of these studies have not only enriched and supplemented relevant studies on the root causes for the creation of pyramidal structure by Chinese private business groups, but provide practical support for firms to make correct and effective use of pyramidal structure as well.
Keywords: Pyramidal structure, tunneling, financing advantage, product market competition

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