Complex Ownership and Capital Structure

1. Complex Ownership and Capital Structure Teodora Paligorova, Bank of CanadaZhaoxia Xu, Bank of Canada EFM Symposium Corporate Governance and ControlCambridge, 10 April 2009 Discussant: Christian Andres University of Bonn

2. Summary (1) Questions and research design • Examines how pyramidal ownership structures and the presence of multiple controlling shareholders affect leverage ratios • Contribution: • Empirical study of the impact of multiple large shareholders on capital structure choices in pyramid firms • Analysis contains about 8,000 firms from G7 countries over the period from 2003 – 2006  Results indicate that pyramidal ownership structures are associated with higher leverage

3. Summary (2) Literature • This paper is related to the following papers: • Literature on pyramid firms and debt (e.g. Faccio et al. (2003) • Papers on the relationship between multiple large shareholders and corporate valuation (e.g. Zwiebel (1995), Burkart et al. (1998, Laeven and Levine (2008)) Main findings/contribution • Pyramid firms use less debt in countries in which creditor rights are well protected by the law • Larger pyramid firms (with lower information asymmetries) use less debt • Pyramid firms are more heavily leveraged than stand-alone firms that are controlled by the same shareholder

4. Summary (3) Main findings and contributions (continued) • Equal distribution of voting right among two dominating shareholders are associated with higher leverage interpreted as collusion and expropriation by controlling shareholders

5. Suggestions (1) General comments • Number of firms/observations varies a lot (!)Table 1: 12,167 firmsRegressions: highest number 7,877 • 35% of the sample (4,258 and 2,757 firms, respectively) are defined as pyramid firms, yet only 1,200 firms are included in the “pyramid regressions”Why do you lose so many observations? • Even though ownership structures are central to the paper, you provide only very few information on ownership, pyramids, etc. • Some grammatical and typographical errors

6. Suggestions (2) Measurement/definition of ownership variables • Main arguments are based on incentives that result from the divergence of control and cash flow rights of dominant shareholders (p.1: “The wedge between control and cash flow rights of controlling shareholders in pyramid firms may create severe risk of expropriation”, p.13, p.18) • However, there is no control for the divergence of cash flow and voting rights! (given the focus of your paper, this point is crucial!) • In addition, there is no control for dual-class shares! • In stand-alone firms, ultimate shareholders might also have incentives to expropriate!

7. Suggestions (3) General comments – voting rights/cash flow rights

8. Suggestions (4) General comments – data and definitions • Does the use of consolidated balance sheets lead to double-counting? • If these firms are defined as pyramids, then (almost) every firm should be part of a pyramid:

9. Suggestions (5) Multivariate analysis • No control for firm fixed-effects •  (Pooled) OLS results will (most likely) be biased due to unobserved heterogeneity • All regressions that examine the effect of the second largest shareholder are limited to the (sub-)sample of pyramid firms 2nd largest shareholder might also form coalitions in stand- alone firms! • In regression table 5, you need to control for the complexity of the pyramid. Firm size is a very crude measure if your argument is based on “...the ability of owners to tunnel resources along the control chains.”

10. Conclusions • Relevant and interesting topic • Main suggestions: • Add some descriptive statistics / information on ownership • Find a way to construct variables that take account of the pyramid structure (# of layers, voting vs. cash flow rights) • Sort out the (serious) econometric issuesThe use of panel estimation techniques will mitigate this concern