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Pyramidal Discounts: Tunneling or Overinvestment? *
Author(s) -
Holmén Martin,
Högfeldt Peter
Publication year - 2009
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/j.1468-2443.2009.01088.x
Subject(s) - shareholder , exploit , pyramid (geometry) , business , portfolio , cash flow , control (management) , dividend , capital (architecture) , monetary economics , investment (military) , finance , economics , corporate governance , archaeology , politics , computer science , law , political science , optics , history , physics , computer security , management
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.