Pyramid Business Groups in East Asia: Insurance or Tunneling?

First draft: April 2001; This version: March 2003A business group with a pyramid ownership structure is a prevalent form in developing countries. I show that the propping up function of pyramid groups exists only in countries without good investor protection where minority shareholders could be expropriated with low cost. A pyramid business group is not insurance mechanism for all group firms. My predictions are supported by the data on East Asian firms in 1990s. Additionally, I find that the pyramid ownership does not affect the valuation of non-distressed firms. This might be the reason that the outsider invested in the group bottom firms before the Asian Crisis.50, [10] p