Beyond Cash Flow and Voting Rights: Valuation and Performance of Firms in Complex Ownership Structures

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Abstract
We propose new measures to describe the ownership structure of family business groups that go beyond the standard measures of cash flow and voting rights. Our measures include the degree of pyramiding in the ownership structure of a group firm, and the centrality of a firm for the group structure (e.g., whether a given firm is used by the family to control other group firms). We use a unique dataset of Korean family business groups (chaebols) to provide evidence that relates these new ownership variables to the performance and valuation of group firms. In particular we show that firms with high investment requirements and/or low profitability are more likely to be set up in pyramids (a selection effect). In addition, central firms appear to have lower market valuations than public group firms that do not hold large equity stakes in other group firms. Our results suggest that cash flow and voting rights are not the only ownership variables that are associated with performance and valuation of group firms. The results also support Almeida and Wolfenzon's (2006) arguments that the family selects pyramidal ownership to take advantage of the cash retained in the central firms of the group, and that pyramidal investments are not beneficial for the minority shareholders of the central firms (who discount the value of their shares accordingly).

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