Pyramidal Discounts: Tunneling or Overinvestment?


  • * We appreciate the generosity of The Bank of Sweden Tercentenary Foundation and The Jan Wallander and Tom Hedelius Foundation. Peter Högfeldt gratefully acknowledges support from The Foundation for Economics and Law and the hospitality of CDDRL at Stanford Institute of International Studies. We would like to thank an anonymous referee, Heitor Almeida, Malcolm Baker, Sudipto Dasgupta, Joseph Fan, Ulrich Hege, Urban Jansson, Tim Jenkinson, Charles Kahn, Raja Kali, Randall Morck, Enrico Perotti, Stephen Ross, Subrata Sarkar, Andrei Shleifer, Fredrik Synnerstad, and Daniel Wolfenzon, and participants at the CEPR/ECGI/INSEAD/NBER/University of Alberta joint conference on The Evolution of Corporate Governance and Family Firms in Fontainebleau, the workshop on The Governance of Closely Held Corporations at Copenhagen Business School, the HKUST Summer Symposium on Family Business Research, the European Finance Association's meeting in Moscow, the SIFR Corporate Governance Conference, and seminar participants at HECER, Helsinki, and University of Bologna for valuable comments.

Martin Holmén
Department of Economics
Uppsala University
Box 513, SE-751 20 Uppsala


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.