Complex Ownership and Capital Structure Teodora Paligorova, Bank of Canada Zhaoxia Xu, Bank of Canada EFM Symposium Corporate Governance and Control Cambridge, 10 April 2009 Discussant: Christian Andres University of Bonn

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 Christian Andres, 10 April 2009

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 Christian Andres, 10 April 2009

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 Christian Andres, 10 April 2009

Suggestions (1) General comments Number of firms/observations varies a lot (!) Table 1: 12,167 firms Regressions: 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 Christian Andres, 10 April 2009

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! Christian Andres, 10 April 2009

Suggestions (3) General comments – voting rights/cash flow rights Christian Andres, 10 April 2009

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: Christian Andres, 10 April 2009

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.” Christian Andres, 10 April 2009

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 issues The use of panel estimation techniques will mitigate this concern Christian Andres, 10 April 2009