Organizational Structure as a Decentralization Device: Evidence from Corporate Pyramids

This paper examines the pyramidal organizational structure of newly listed local-government-controlled firms in China. These controlling owners are constrained by the Chinese laws prohibiting free transfer of state ownership. Pyramiding allows them to credibly decentralize decision rights to firm management without selling off their ownership. Our empirical results support this conjecture. State controlling owners build more extensive corporate pyramids when they are less burdened with fiscal or unemployment problems, when they have more long-term goals, and when their firms' decisions are more subject to market and legal disciplines. The more extensive pyramids are also associated with higher Tobin's Q, better labor and investment efficiency and greater total factor productivity. This relation between pyramidal structure and firm operating efficiency however is found to be endogenous to the local government incentives and the regional institutional environment faced by the firms.