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Pyramidal Discounts: Tunneling or Overinvestment?

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  • Martin Holmén
  • Peter Högfeldt

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.

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  • Martin Holmén & Peter Högfeldt, 2009. "Pyramidal Discounts: Tunneling or Overinvestment?," International Review of Finance, International Review of Finance Ltd., vol. 9(1‐2), pages 133-175, March.
    • Handle: RePEc:bla:irvfin:v:9:y:2009:i:1-2:p:133-175
    DOI: 10.1111/j.1468-2443.2009.01088.x
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    Cited by:

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    2. Irfah Najihah Basir Malan & Norhana Salamudin & Noryati Ahmad, 2013. "Determinants of Firm Affiliation to Pyramid Structure: A Survey from Malaysian Public Listed Firms," Journal of Asian Scientific Research, Asian Economic and Social Society, vol. 3(6), pages 549-569, June.
    3. Maurizio Iacopetta & Raoul Minetti & Pietro F Peretto, 2019. "Financial Markets, Industry Dynamics and Growth," Economic Journal, Royal Economic Society, vol. 129(621), pages 2192-2215.
    4. Imen Derouiche & Majdi Hassan & Sarra Amdouni, 2018. "Ownership structure and investment-cash flow sensitivity," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 31-54, March.
    5. Melsa Ararat & Asli M. Colpan & Dirk Matten, 2018. "Business Groups and Corporate Responsibility for the Public Good," Journal of Business Ethics, Springer, vol. 153(4), pages 911-929, December.
    6. repec:hal:spmain:info:hdl:2441/1ani1qs24g9in97gbhnanm575u is not listed on IDEAS
    7. Fogel, Kathy S. & Lee, Kevin K. & Lee, Wayne Y. & Palmberg, Johanna, 2013. "Foreign Investors as Change Agents: The Swedish Firm Experience," Working Paper Series in Economics and Institutions of Innovation 311, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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