On the Chinese Pyramids: A Dichotomy of Causes, Evolution and Consequences∗

Using hand-collected data, we study the evolution, causes, and economic effects of the pyramidal ownership structure in China’s listed firms over 2001-2008. We quantitatively characterize the use of pyramidal structure by private firms and local state controlled firms. We find that private owners in China show strong incentives to build more extensive pyramids in weak institutional environments but government owners do not. We also find that the sophistication level of pyramids, measured by the number of layers and the deviation of control from ownership, is negatively associated with private firms’ stock market performance and operating performance; but we fail to identify the same evidence in local state controlled firms. In-depth analysis shows that tunneling, high cost of capital, and lower investment efficiency drive the negative relation between pyramidal structure and private firms’ performance. Our work suggests that private owners and government owners may build pyramids for different reasons and that state ownership and private ownership have different implications for economic effects of pyramidal structure. JEL Classification: G32, G34