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Institutions and Organizational Structure: The Case of State-Owned Corporate Pyramids

Author

Listed:
  • Joseph P. H. Fan
  • T. J. Wong
  • Tianyu Zhang

Abstract

Pyramidal organizational structures are common throughout the world. This article considers an explanation for pyramids built by the state: separating firms from political interference. Although intermediate pyramidal layers insulate managers from a pyramid's top owners and hence induce agency costs, they also minimize political costs of state intervention. All else equal, the optimal division of power between the government and the managers should be the point at which the marginal agency costs are equal to the marginal political costs. Our empirical results, based on hand-collected data for 742 local government-owned Chinese business groups are generally in line with this hypothesis. (JEL: D21, D23, G32, L22, L32, P31). The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Joseph P. H. Fan & T. J. Wong & Tianyu Zhang, 2013. "Institutions and Organizational Structure: The Case of State-Owned Corporate Pyramids," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(6), pages 1217-1252, December.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:6:p:1217-1252
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    File URL: http://hdl.handle.net/10.1093/jleo/ews028
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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