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Innovation in pyramidal ownership structures

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  • Gavious, Ilanit
  • Hirsh, Nimrod
  • Kaufman, Dan

Abstract

We examine the association between a pyramidal ownership structure and the intensity of high-tech companies’ investments in innovation. We find that companies in pyramidal business groups invest in innovation with greater intensity than similar companies that are not part of such an ownership structure. Furthermore, the intensity of investment in innovation is significantly higher the lower the firm is situated in the pyramid, where the ultimate owner has a smaller share of the equity. However, these findings are statistically significant only for biotechnology firms. It seems that for biotech companies, the pyramidal structure serves to transfer the immense investment risk inherent in them away from the ultimate owners further down the pyramid where they have a lower stake in profits and losses. In that sense, the inclusion of biotech firms further down the pyramid is, in effect, a particular kind of tunneling.

Suggested Citation

  • Gavious, Ilanit & Hirsh, Nimrod & Kaufman, Dan, 2015. "Innovation in pyramidal ownership structures," Finance Research Letters, Elsevier, vol. 13(C), pages 188-195.
    • Handle: RePEc:eee:finlet:v:13:y:2015:i:c:p:188-195
    DOI: 10.1016/j.frl.2015.01.004
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    References listed on IDEAS

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    1. Morck, Randall K. (ed.), 2000. "Concentrated Corporate Ownership," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226536781, April.
    2. Sharon Belenzon & Tomer Berkovitz, 2010. "Innovation in Business Groups," Management Science, INFORMS, vol. 56(3), pages 519-535, March.
    3. Philip Cooke, 2008. "Distinctive proximities : between implicit and explicit knowledge in ICT and biotechnology innovation," Revue d'économie régionale et urbaine, Armand Colin, vol. 0(3), pages 381-409.
    4. Enrico Guzzini & Donato Iacobucci, 2014. "Ownership as R&D incentive in business groups," Small Business Economics, Springer, vol. 43(1), pages 119-135, June.
    5. Lucian A. Bebchuk & Reinier Kraakman & George Triantis, 2000. "Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights," NBER Chapters, in: Concentrated Corporate Ownership, pages 295-318, National Bureau of Economic Research, Inc.
    6. Callen, Jeffrey L. & Gavious, Ilanit & Segal, Dan, 2010. "The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication," Journal of Contemporary Accounting and Economics, Elsevier, vol. 6(2), pages 61-76.
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    Cited by:

    1. Ma, Yonghong & Zhao, Zhihua, 2024. "Proximity in consumer network and company new products decisions," Finance Research Letters, Elsevier, vol. 59(C).
    2. Elena Karnoukhova & Anastasia Stepanova & Maria Kokoreva, 2018. "The Influence Of The Ownership Structure On The Performance Of Innovative Companies In The Us," HSE Working papers WP BRP 70/FE/2018, National Research University Higher School of Economics.
    3. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    4. Li, Miao & He, Meng & Wang, Aoran, 2024. "Concerted action agreements, corporate innovation, and financial market outcomes: A pre-registered report," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    5. Yu, Gun Jea & Hong, KiHoon, 2016. "Patents and R&D expenditure in explaining stock price movements," Finance Research Letters, Elsevier, vol. 19(C), pages 197-203.
    6. Ruqia Shaikh & Zhiqiang Li & Xiaoli Wang & Muhammad Rizwan Nazir, 2022. "Firm innovation and ultimate control mechanism: Case of emerging market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 440-456, March.

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    More about this item

    Keywords

    Control; Innovation; Ownership; Pyramids; R&D; Tunneling;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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