Pyramidal Ownership and the Creation of New Firms*
Jan Bena and Hernán Ortiz-Molina
ABSTRACT
We study the role of pyramidal ownership structures in the creation of new firms. Our results
suggest that pyramids arise because they provide a financing advantage in setting up new firms
when the pledgeability of cash flows to outside financiers is limited. Parent companies supply
inside funds to new firms which, due to large investment requirements and low pledgeable cash
flows, cannot raise enough external financing. The financing advantage of pyramidal structures
is pervasive in many countries, exists regardless of whether new firms are set up by business
groups or by smaller organizations, and is an important underpinning of entrepreneurial activity.
JEL Classification: G30; G32; G34.
Keywords: Ownership pyramids; Parent companies; Startups; New firms; Access to capital.
Both authors are at the Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver
BC, Canada V6T 1Z2. Jan Bena can be reached at 604-822-8490 or [email protected]; Hernán Ortiz-Molina
can be reached at 604-822-6095 or [email protected]. We are especially grateful to an anonymous referee,
as well as to Heitor Almeida, Martin Boyer, Lorenzo Garlappi, Ron Giammarino, Xavier Giroud, Thomas
Hellmann, Paul Irvine, Štepán Jurajda, Sandy Klasa, Kai Li, Bill Schwert, Yishay Yafeh, seminar participants at the
Pacific Northwest Finance Conference 2009, the Financial Management Association Meetings 2010, the Northern
Finance Association Meetings 2011, the Western Finance Association Meetings 2012, University of Alberta,
Claremont McKenna College, Queen’s University, and York University for helpful comments. The authors
acknowledge the financial support from the Social Sciences and Humanities Research Council of Canada.
*
1. Introduction
Organizational structures in which multiple firms are linked through equity ownership are
ubiquitous in emerging markets and in many developed countries. They are often arranged as
pyramids, in which an individual or a family controls a firm, which in turn controls another firm,
which could itself control another firm, etc.1 Despite their prevalence, it is not yet entirely clear
why such organizations arise. It is generally argued that ultimate owners create pyramids to
separate control rights from cash flow rights and capture private benefits of control at the
expense of minority shareholders (see Morck, Wolfenzon, and Yeung, 2005 for a discussion of
the evidence). In contrast to this view, Almeida and Wolfenzon (2006a) theoretically show that
ultimate owners could create pyramids because such structures provide a financing advantage in
setting up new firms when the pledgeability of cash flows to outside financiers is limited.
We study whether pyramidal ownership structures arise due to the financing advantage
described by Almeida and Wolfenzon (2006a) in a unique setting: The ownership structure and
project selection decisions underlying the creation of new firms. Our focus on the creation of
new firms is of interest, since it is often argued that new firms play a key role in the economy –
they increase competition, generate employment, and foster economic growth – but that their
development is hindered by capital market imperfections. Our evidence supports the theory and
suggests that the financing advantage of pyramidal ownership is an economically important
underpinning of entrepreneurial activity: It is pervasive in many countries, it exists regardless of
whether new firms are set up by business groups or by small organizations, and it is used to fund
new firms which, due to the nature of their projects, cannot raise enough external financing.
We compile a data set with almost 57,000 newly incorporated private manufacturing firms
in 19 European countries. We observe whether a new firm is appended to an existing firm
through an ownership link or it is set up as owned only by individuals. We can also trace the
ownership links among all firms in the organization to which the new firm belongs and
distinguish different types of parent organizations. The new firms are small (with median assets
of €220 thousand) and have highly concentrated ownership. A quarter of them have controlling
stakes by parent companies and these new firms with parent companies account for 76% of the
assets added to manufacturing by all new firms in each year. Interestingly, the vast majority of
parent companies are not affiliated with business groups. Pyramidal ownership links are
La Porta, Lopez-de-Silanes, and Shleifer (1999) document ownership concentration around the world. Claessens,
Djankov, and Fan (2000), Faccio and Lang (2002), and Khanna (2000) show the prevalence of pyramids. Morck,
Wolfenzon, and Yeung (2005) note that this evidence ‘leaves the structure typical of U.S. firms – stand-alone firms
with diffuse ownership and professional management – the rarest of curiosities in most of the rest of the world’.
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pervasive among new firms, which highlights the need to understand why they arise, the role
they play in the financing of new firms, and the impact they could have on the economy.
Almeida and Wolfenzon (2006a) study an opportunity to set up a viable new firm, either by
an entrepreneur with no wealth or a family whose wealth is a controlling equity stake in an
existing firm. The controlling owner captures a fraction of the cash flows, so the amount of
external financing the new firm can raise equals the present value of cash flows pledgeable to
outside financiers. If the pledgeable NPV (the present value of the pledgeable cash flows less the
required investment) is positive, the new firm can obtain all the financing externally. The new
firm can be set up by the entrepreneur or the family, and the family chooses to control it with
direct ownership to avoid sharing the pledgeable NPV with the minority shareholders of the
existing firm. We call these firms new stand-alone firms. If the pledgeable NPV is negative, only the
family can set up the new firm, using the existing firm’s retained earnings. The family chooses to
do it through a pyramidal ownership link to the existing firm due to a financing advantage: It
can supply the new firm with more inside funds and it shares the negative pledgeable NPV with
the existing firm’s minority shareholders. We call these firms new firms with parent companies.
The theory predicts that, if pyramidal ownership links arise due to limited pledgeability of
cash flows, then new firms with large investment requirements and/or low present value of
pledgeable cash flows should be set up by parent companies; conversely, those with small
investment requirements and/or high present value of pledgeable cash flows should be set up as
stand-alone firms. In addition, new firms with parent companies should receive more inside
funds from their controlling owners than stand-alone new firms. For a new firm, its size
measured by the value of its assets captures the investment requirement and its reported
profitability is directly related to the ability to generate pledgeable cash flows. Therefore, our
analyses compare the size, profitability, and inside equity financing of new firms with parent
companies to those of stand-alone ones matched on country, industry, legal form, age since
incorporation, and calendar year. The matching allows us to capture the differences in the
characteristics of new firms’ underlying projects that drive the organizational decision.
We find that new firms with parent companies are 6.1 times larger than stand-alone ones.
We then break new firms based on whether their parent companies are affiliated with larger
organizations, which we call business groups, or smaller ones, and compare firms in each subsample to stand-alone firms. New firms with parent companies are larger in both cases. We also
find that new firms whose parent companies are affiliated with business groups are larger than
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matched new firms with unaffiliated parent companies. This suggests that business groups,
which command larger resources, can set up new firms with larger investment requirements.
Next, we find that new firms with parent companies are 34.4% less profitable than standalone ones during their initial three years of operation. This difference in profitability compared
to new stand-alone firms exists both for new firms whose parent companies are affiliated with
business groups and for those with unaffiliated parent companies. In addition, new firms whose
parent companies are affiliated with business groups are less profitable than those whose parent
companies are unaffiliated. We further ask whether the initial difference in profitability between
new firms with parent companies and stand-alone ones reverts as firms grow older. The age
profile of the reported profitability is increasing over ages one to six years old and is flat over
subsequent ages for firms with parent companies, and is somewhat decreasing for stand-alone
firms. Importantly, the reported profitability of firms with parent companies remains below that
of stand-alone ones even when firms reach 20 years old. These results suggest that new firms
with parent companies have lower average profitability and thus lower present value of
pledgeable cash flows.
The main mechanism behind the financing advantage of pyramidal ownership is that the
controlling family supplies the new firm with more funds when it sets up the new firm indirectly
through a parent company compared to when it sets up the new firm with direct ownership.
Hence, new firms with parent companies should receive a larger amount of equity financing
from their controlling owner (i.e., of inside equity). Supporting this prediction, we find that the
amount of inside equity of new firms with parent companies is ten times that of stand-alone new
firms and the inside equity-to-total assets ratio is 40.3% higher. In addition, the family’s ability to
provide inside funds to a new firm should depend on the pool of resources it commands. In line
with this view, we show that new firms receive larger amounts of inside equity when their parent
companies have more retained earnings and when they are affiliated with larger organizations.
Finally, we find that new firms with parent companies and stand-alone ones exhibit
important differences in production technology choices. Relative to matched stand-alone new
firms, those with parent companies have 51.0% higher capital-labor ratios and pay 18.2% higher
wages. This evidence suggests that new firms that rely more on fixed assets and on expensive
labor have larger funding needs and, given the limited pledgeability of cash flows, such firms
require more inside funds. Stand-alone firms might have incentives to choose higher capitallabor ratios, as asset tangibility improves their access to credit, but this effect is not dominant in
our sample.
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Our evidence provides support for the theory. It suggests that pyramidal structures are
associated with a financing advantage in providing inside funds to new firms, and that pyramidal
links to parent companies are used to set up new firms that cannot raise enough external
financing as stand-alone firms. It also suggests that the financing advantage of pyramidal
ownership exists regardless of the size of the organization to which the parent company belongs.
More generally, it is broadly consistent with the view that new firms ‘self select’ into ownership
structures that alleviate their financing constraints at the time they are set up. No alternative
theory can explain all our results. However, as we discuss below, we entertain and rule out
various alternative explanations that could account for some of our results.
The diversion of profits by controlling owners cannot empirically explain why new firms
with parent companies are less profitable than stand-alone ones. First, the wedge between the
control and cash flow rights of controlling owners due to pyramidal links creates diversion
incentives and should reduce reported profitability if diversion takes place. However, we show
that in the sample of new firms with parent companies, the magnitude of this wedge does not
affect reported profitability. Second, as in Bertrand, Mehta, and Mullainathan (2002), we test for
diversion using the idea that, if there is more diversion in new firms with parent companies than
in stand-alone ones, the reported profitability of new firms with parent companies should be less
sensitive to profitability shocks. This is not the case in our sample.
Within the theory, all new firms with positive pledgeable NPV are set up as stand-alone
ones indistinctly by an entrepreneur/family who owns an existing firm or by one who does not.
However, this distinction is important for reasons outside of the theory. An entrepreneur who
does not own an existing firm can only set up her first venture as a stand-alone firm and such
firm is often small. After gaining experience, she might set up subsequent ventures that are
larger, some as stand-alone firms and some using a pyramidal link to the first firm. This ‘life
cycle of entrepreneurs’ could cause new stand-alone firms to be smaller on average than those
with parent companies. The reason is that the former group contains all first ventures (and may
contain some subsequent ones) while the latter group contains only subsequent ventures. To
address this issue, we compare new firms with parent companies to a subsample of stand-alone
new firms that are set up by entrepreneurs who already control at least one existing firm, i.e., to
those stand-alone new firms that could have been set up pyramidally. This has no material effect
on our results.
Our results are not driven by legal or tax issues. First, we compare new firms with parent
companies and stand-alone ones within country-industry-legal form-age-calendar year cells, and
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thus control for (time-varying or not) differences in legal and tax codes across countries,
industries, or form of incorporation. Second, the European Commission’s Parent-Subsidiary
Directive explicitly forbids European Union members from taxing intra-company dividends and
thus such taxes do not distort organizational decisions by making the stand-alone form more tax
efficient. Third, our sample might contain some mature firms with accumulated losses that were
acquired and re-incorporated as new firms with parent companies to reduce the organization’s
tax bill. Our results hold if we focus solely on startups that cannot provide such tax advantage.
We also rule out other alternative explanations. First, in our sample, the organizational
decision about how to set up a new firm is not aimed at facilitating cooperation between the
new firm and its ultimate corporate shareholder in product markets. Specifically, our results hold
if we exclude from the sample new firms with potential for horizontal (between firms in the
same industry) or vertical (between firms related by supply chains) cooperation with their
ultimate corporate shareholders. Second, the small organizations in our data have controlling
owners who do not possess significant economic resources, and hence their pyramidal growth is
unlikely aimed at gaining market power or political influence. Third, our results hold if we only
use stand-alone new firms with complete ownership data and thus are not driven by incomplete
reporting of ownership, which could lead us to classify some new firms with undisclosed parent
companies as stand-alone firms. Last, our comparison of new firms with parent companies to
stand-alone ones is within country-industry-legal form-age-calendar year cells, and thus it is not
affected by differences in financial development across countries.
We conduct several robustness checks on our main results. First, they hold for new firms in
the UK, in which the data coverage is complete, and outside the UK, where the coverage is
tilted towards larger firms. Second, they hold if we drop from the sample those new firms whose
parent companies are suspect shells, i.e., firms with no real operations. Third, they are not
affected by differences in enterprise death rates. Fourth, they hold if we match new firms with
parent companies to stand-alone ones using propensity scores estimated using country, industry,
legal form, age, and year dummies instead of matching exactly on those attributes. Last, they
hold if we use alternative approaches to construct the sample of new firms.
There are two papers which focus on publicly listed firms to study why pyramidal business
groups exist and are close to ours. One is Almeida, Park, and Subrahmanyam (2011), who show
that firms’ position within chaebols depend on their profitability. They find that the firms the
family controls pyramidally are less profitable than those it controls directly, and that when the
family expands its chaebol by acquiring existing firms it places low profitability targets down the
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pyramid but directly owns highly profitable ones. The other is Masulis, Pham, and Zein (2011),
who study business groups in a cross-section of 45 countries. They find that the firms the group
controls pyramidally invest more than those it controls directly and that, within a pyramid,
internal equity funding, investment rates, and firm value increase down the ownership chain. In
addition, when cash-flows and control rights of group firms are separated through mechanisms
other than pyramiding, these firms are valued at a discount relative to other member firms.
Both papers as well as ours show that pyramids provide a financing advantage when there is
limited pledgeability of cash flows, but we add to this prior work in important ways. First, we
study the decisions of small organizations that are not affiliated with family business groups and
consist solely of private firms. These organizations are pervasive in Europe, and likely elsewhere
around the world, but have not been studied before. We show that pyramidal ownership plays a
key role in the financing of entrepreneurial activity outside business groups. Second, we observe
how new firms’ organizational decisions at the time of incorporation are affected by their
financing needs as measured by the characteristics of the underlying projects. Third, we study
how organizations expand by setting up new firms through the creation of new pyramidal
ownership links. The focus on pyramidal growth ensures that our inferences are not confounded
by historical factors that shaped the current structures of pyramids in many countries (see Morck
and Steier, 2005). Fourth, we show that, as firms grow older after their incorporation, the
profitability of firms with parent companies remains below that of stand-alone ones. This
indicates that new firms with parent companies have a lower present value of pledgeable cash
flows as of the time they are set up. Fifth, we show that new firms set up pyramidally differ from
those set up as stand-alone ones in capital intensity and average wage, which are associated with
different technological choices. Last, we use matching to ensure that differences in the
characteristics of new firms or their environments across country-industry-legal form-agecalendar year cells, which could affect organizational decisions, do not confound our inferences.
Previous work shows that small organizations which grow pyramidally can become business
groups (Aganin and Volpin, 2005) and that group affiliation is more common in less financially
developed countries, mainly in industries with high reliance on external finance or information
asymmetry (Belenzon and Berkowitz, 2008). Business groups use their internal capital markets to
support financially weak members (Morck and Nakamura, 1999; Gopalan, Nanda, and Seru,
2007; Gopalan, Nanda, and Seru, 2011), and allow members to share risks (Khanna and Yafeh,
2005). There is also a debate on how business groups affect the allocation of resources and on
whether they should be endorsed or dismantled (e.g., Khanna and Palepu, 1999; Khanna, 2000;
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Morck, Wolfenzon, and Yeung, 2005; Almeida and Wolfenzon, 2006b; Khanna and Yafeh,
2007). We show that pyramids play a key role in setting up new firms that should be considered
when designing public policies.
Recent research studies the effect of ownership by corporations on firm performance,
especially in the context of business groups (e.g., Khanna and Palepu, 2000; Khanna and Rivkin,
2001; Claessens, Djankov, Fan, and Lang, 2002; Claessens, Fan, and Lang, 2006; Volpin, 2002;
Ferris, Kim, and Kitsabunnarat, 2003; Joh, 2003; Baek, Kang, and Park, 2004; Masulis, Pham,
and Zein, 2011). Our results suggest that less profitable new firms self select into ownership
structures with parent companies that can satisfy their financing needs, inducing a negative
correlation between corporate ownership and the regression’s error term. Hence, this selection
might cause a downward bias in the estimated effect of corporate ownership on profitability.
Our paper is also related to studies of small firms’ access to capital (e.g., Petersen and Rajan,
1994; Berger and Udell, 1995; Berger and Udell, 1998; Berkowitz and White, 2004), of how
venture capitalists finance and monitor startups (e.g., Lerner, 1995; Gompers, 1995; Hellmann
and Puri, 2000; Hellmann and Puri, 2002; Kaplan and Strömberg, 2003), of the effect of
regulatory requirements on firm entry (e.g., Klapper, Laeven, and Rajan, 2006) and to the
industrial organization literature on firm entry (see Gilbert, 1989 for a survey). We show that, in
Europe, parent companies play a role in relaxing the financial constraints of new firms that
parallels that of venture capitalists in the U.S.
The rest of the article is organized as follows. Section 2 discusses the theory. Section 3
describes the data and the empirical method. Section 4 compares the characteristics of new firms
with parent companies and stand-alone ones. Section 5 discusses alternative interpretations of
our results. Section 6 discusses the robustness of our main results. Section 7 concludes.
2. The Role of Parent Companies in the Financing of New Firms
Our analyses are guided by Almeida and Wolfenzon’s (2006a) theory. To summarize their
arguments, consider an individual who has an opportunity to set up a new firm that requires an
up-front investment I and generates cash flows with a present discounted value R  I . The
individual is endowed with wealth W  I which she can supply to the new firm as inside funds.
Therefore, she must be able to raise I  W from outside financiers to set up the new firm.
With perfect capital markets, the new firm can pledge R to outside financiers, raise enough
external financing, and start operations regardless of the amount of inside funds supplied by the
individual. Consider instead a situation in which the present value of the cash flows pledgeable
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to outside financiers – and thus the maximum amount of external financing the firm can raise –
is R P  R. The individual who controls the new firm captures R  R P and the new firm’s
pledgeable NPV is R P  I . If R P  I , the new firm can raise enough external financing and start
operations regardless of the amount of inside funds available. If R P  I , the new firm can be set
up only if the individual can supply sufficient inside funds, that is, if W  I  R P . The limited
pledgeability of cash flows makes the availability of inside funds important: An individual who is
able to supply little inside funds can only set up a new firm with a small I and/or high R P .
Assume that two types of individuals can set up the new firm: An ‘entrepreneur’ with no
incumbent business or a ‘family’ who already controls an existing firm. The entrepreneur has no
wealth and hence she can only set up the new firm if R P  I . The family’s only wealth comes
from its controlling ownership stake in the existing firm, 0    1. The family can use the
existing firm’s retained earnings RE to provide the new firm with inside funds using two
organizational structures. First, the family can make the existing firm pay out the retained
earnings and use its share of the payout, RE , to establish a direct controlling stake in the new
firm. Second, the family can make the existing firm use all of the retained earnings to establish a
controlling stake in the new firm. This gives the family control of the new firm indirectly
through its control of the existing firm, i.e., through a ‘pyramidal ownership link’. The pyramidal
structure allows the family to supply the new firm with a larger amount of inside funds.
In this setting, Almeida and Wolfenzon (2006a) derive a key result (Result 1) about how the
organizational decision depends on the new firm’s pledgeable NPV. If R P  I , the family can
set up the new firm using either organizational structure, but it chooses to directly own the new
firm to avoid sharing its positive pledgeable NPV with the minority shareholders of the existing
firm. If R P  I and RE  I  R P , the family always chooses to set up the new firm through the
pyramidal ownership link, because it provides a financing advantage: The family can supply
more inside funds to the new firm and benefits from sharing the new firm’s negative pledgeable
NPV with the minority shareholders of the existing firm.
In summary, depending on the sign of their pledgeable NPV, new firms can have two
ownership structures: Controlled solely by individuals or controlled by another company. If
R P  I , then the new firm can be set up by the entrepreneur or by the family who controls it
directly. In both cases the new firm is controlled solely by individuals. Since such firms can be
set up independently of other companies, we refer to them as new stand-alone firms. If R P  I , the
entrepreneur cannot set up the new firm, but the family does it through the creation of a
pyramidal ownership link (provided it can supply sufficient inside funds). Hence, an existing
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firm directly controls the new firm and we refer to such firms as new firms with parent companies. As
Almeida and Wolfenzon (2006a) state in Result 2, it follows that new firms with large I and/or
low R P are more likely to have a negative pledgeable NPV and thus to be set up as new firms
with parent companies. This implies that the ownership structures of new firms should be
empirically related to measures of I and R P , and that new firms with parent companies should
receive more equity from their controlling owners – inside equity – than new stand-alone ones.
In our empirical tests, we capture I using the book value of a new firm’s assets. A new
firm’s R P is difficult to measure accurately, as one would need to know the stream of future
pledgeable cash flows expected at the time of incorporation and use a proper discount rate.
Following Almeida, Park, and Subrahmanyam (2011), we use a new firm’s reported profitability
to measure its ability to generate pledgeable cash flows. Reported profitability is indicative of
R P for three reasons. First, more profitable firms usually can raise more external financing,
which suggests that they can pledge more cash flows. Second, firms can pledge those cash flows
they report in audited financial statements. Last, profitability is a major component of cash flows
and thus it is correlated with the present value of pledgeable cash flows.
The null hypothesis underlying our empirical analyses is that limited pledgeability of cash
flows does not affect the organizational decisions of how to set up new firms, and so the size,
profitability, and amount of inside equity of new firms are unrelated to their ownership
structures. Hence, the alternative hypothesis we take to the data is summarized as follows:
Hypothesis: Limited pledgeability of cash flows to outside financiers gives rise to pyramidal ownership
links and, as a result, new firms with parent companies are larger, less profitable, and receive a larger amount of
inside equity when they are set up than new stand-alone firms.
Our main empirical tests in Section 4 estimate the differences in the (i) size, (ii) profitability
(both at the time of incorporation and as firms grow older), and (iii) amount of inside equity of
new firms with parent companies and stand-alone ones. If Almeida and Wolfenzon (2006a)
correctly describe the process by which new firms are created, then the magnitudes of the
differences quantify how severe the friction of a limited pledgeability of cash flows is. We also
study whether parent companies with higher RE relax new firms’ financial constraints by more,
and whether the nature of new firms’ production technology, which affects R P and I , is related
to their ownership structures. Last, we entertain various alternative explanations of our results.
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3. Data and Empirical Method
3.1. Data Sources
We use Bureau Van Dijk’s (BvD) Amadeus database that contains harmonized financial
data on 7 million private and public companies spanning all industries in 38 European countries.
BvD collects the data from about 50 vendors across Europe (e.g., company registrars of national
statistical offices, credit registries, stock exchanges, and regulatory filings). Coverage is limited in
some countries, but in 23 it is comparable and representative of the population of firms reported
in aggregate data by the European Commission (Arellano, Bai, and Zhang, 2012). The advantage
of Amadeus is that it covers young private firms and contains detailed accounting data.
A firm appears in Amadeus as long as it files its financial statements, but it is kept in the
database only for four extra years after its last filing. Also, each update of Amadeus contains
only the most recent 10 years of firms’ financial data (if available). We therefore combine the
Amadeus DVD updates for May 2004 and May 2007 with more recent updates of Amadeus
downloaded from WRDS in July 2007, April 2008, and August 2009. This allows us to add back
firms deleted from more recent updates – which eliminates the survivorship bias inherent in the
database – and to extend firms’ historical accounting data beyond the most recent 10 years.
Given the two-year reporting lag in Amadeus, our accounting data span the period 1993-2006.
Amadeus reports each firm’s shareholders and their ownership stakes. This allows us to
classify shareholders into corporations or individuals and to identify the controlling owners.
Each Amadeus update provides the cross-sectional ownership data most recently verified by
BvD. To construct an annual panel of ownership data we use seven Amadeus DVD updates:
May 2001, May 2002, July 2003, May 2004, October 2005, September 2006, and May 2007. We
supplement these data with more recent updates of Amadeus downloaded from WRDS in July
2007, April 2008, and August 2009. Finally, we also add ownership data from Orbis, BvD’s
product with world-wide coverage issued in November 2008. The resulting ownership panel
data set gives a unique breadth of cross-sectional coverage over the period 2001-2008.
3.2. Sample of New Firms
We study manufacturing firms, i.e., those with three-digit International Standard Industry
Classification (ISIC) codes 151 to 366. We drop firms whose industry is only defined at the twodigit level and four countries (Belgium, Finland, Netherlands, and Sweden) with incomplete
ownership data for small firms. We use only firms with more than €1,000 in total assets and
non-missing ownership data. We drop firms less than one year old since incorporation because
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their financial data reflect less than one year of operation and are not comparable to the annual
financial data of other firms. Some new firms appear in our data for the first time when they
reach ages two or three years old. To avoid misrepresenting the population of new firms, we
identify new firms as those with ages one to three years old (Klapper, Laeven, and Rajan, 2006
use a similar approach). This also takes into account that new firms may take one or two years
after incorporation to reach the desired level of initial investment and economic performance.
Our final sample contains 56,888 new firms in 19 countries and in 100 three-digit ISIC
manufacturing industries during 2001-2006 with both accounting and ownership data.
3.3. Key Variables and Summary Statistics
We capture a new firm’s investment requirements using two measures of size, Total Assets
and Fixed Assets, both in thousands of Euro. Our measures of reported profitability, which
capture a new firm’s ability to generate pledgeable cash flows, are operating income before
interest, taxes, depreciation, and amortization scaled by total assets (EBITDA/Total Assets) and
operating income before interest and taxes scaled by total assets (EBIT/Total Assets). To gauge
the amount of inside equity the controlling owner supplies to a new firm, we use both Inside
Equity in thousands of Euro and Inside Equity/Total Assets. For stand-alone new firms, we define
the controlling owner as the individual with the largest ownership stake and calculate inside
equity as the book value of the new firm’s equity times the controlling owner’s stake. For new
firms with parent companies, the inside equity is supplied by the parent company, and we
calculate it as the book value of the new firm’s equity times the parent company’s ownership
stake. In the few cases a new firm has more than one parent company, we use the parent with
the largest stake. Last, we measure differences in technology using the capital-labor ratio (Fixed
Assets/Employment) and the average wage (Wages/Employment), both in thousands of Euro.
Table 1 reports summary statistics after dropping observations in the top and bottom 1% of
the distribution of each variable to remove outliers (we also do this throughout our analyses).
The median (mean) size of new firms measured by Total Assets is €217.2 (€1,934.2) thousand and
it ranges from €20.4 thousand at the 10th percentile of the distribution to €3,145.0 thousand at
the 90th percentile. The median new firm is profitable, with EBITDA/Total Assets of 10.6% and
EBIT/Total Assets of 4.9%. Profitability measured by EBITDA/Total Assets ranges from -8.3% at
the 10th percentile of the distribution to 32.3% at the 90th percentile. The median (mean) Inside
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Equity/Total Assets is 1.1% (6.8%).2 The median new firm also has Fixed Assets/Employment of
€15.6 thousand and Wages/Employment of €31.3 thousand, respectively.
The typical private new firm in our sample is very small and profitable. This highlights a
unique feature of our study, namely, we study the role of pyramidal ownership links to parent
companies in the creation of startups. New ventures are argued to play a key role in the
economy and there is a widespread concern that capital market imperfections could hinder their
access to external finance. Our setting is ideal to test Almeida and Wolfenzon’s (2006a) theory.
3.4. Ownership Structure
We identify new firms with parent companies as those that have at least one direct
shareholder who is incorporated as a firm. The remainder new firms, who are owned solely by
individuals, are classified as new stand-alone firms. We further classify new firms with parent
companies into those whose parent companies are affiliated with a large organization that we
call a ‘business group’ for simplicity, and those that are not. We define a business group as an
organization with an ultimate corporate shareholder who controls at least three affiliated firms at
the 10% level (either directly or indirectly, possibly through multiple chains of ownership links),
and the sum of the total assets of all affiliates controlled at the 10% level together with the total
assets of the ultimate corporate shareholder is at least €30 million. To calculate the ultimate
corporate shareholder’s control stake in each affiliated firm, we take the minimum control stakes
in each of the ownership chains that link it to the affiliated firm and sum over all chains.
Table 2 reports the number of new firms (Panel A) and the total assets new firms bring into
the economy (Panel B) by ownership structure and for each year in our sample. The total
number of new firms increases from 4,695 in 2001 to 22,800 in 2006, mostly due to the
improved coverage of very small new stand-alone firms. This causes the fraction of new firms
with parent companies to decrease over time. The value of the assets new firms add to the
economy ranges from €21.6 billion in 2001 to €32.2 billion in 2006. Focusing on the year 2006,
only 22.9% of new firms have parent companies while 77.1% are stand-alone. Still, new firms
with parent companies account for 75.7% of the assets added to the economy by all new firms
while new stand-alone firms account for only 24.3%. This highlights the need to understand why
some new firms are born with parent companies while others are born as stand-alone ones.
The data for 2006 illustrates that only 2.9% of new firms have parent companies affiliated
with business groups, buy they account for a sizeable 27.3% of the assets added to the economy
2
The median (mean) ratio of inside equity to total equity is 67.0% (70.3%).
12
by all new firms. New firms with unaffiliated parent companies account for 20.0% of new firms
and for 48.4% of the new assets added to the economy by all new firms. Although not tabulated,
63.7% of the new firms with unaffiliated parent companies are appended to a single parent
company which in turn is owned solely by individuals. Moreover, new firms associated with this
simplest pyramidal structure account for 51.2% of the €15.6 billion in new assets added to the
economy by the new firms with unaffiliated parent companies. The prevalence of such simple
organizations suggests that pyramidal links provide advantages that are unrelated to the desire to
gain market power or political influence often associated with the expansion of business groups.
3.5. Cross-Sectional Variation in Ownership, Size, Profitability, and Inside Equity
In Table 3, we describe the cross-sectional variation in the ownership structure, size,
profitability, and inside equity of new firms using data for 2006. Panel A shows that there is
significant variation across countries in the number of new firms, the fraction of new firms with
parent companies, and in the value of the assets they add to the economy. There is also a large
variation in the mean size, profitability, and inside equity of new firms.3 For example, new firms
in the UK are small, highly profitable, and use small amounts of inside equity, while Italian new
firms are large, have low profitability, and use large amounts of inside equity. This variation is
driven in part by factors like financial development, regulatory environment, or the size of the
manufacturing sector, and by differences in the coverage of new firms in Amadeus.
Panel B breaks new firms according to their legal form of incorporation. New firms
incorporated as ‘Public’ Limited companies are private limited-liability companies that issue
shares that can be listed (but none of the new firms in our sample have listed stock yet). In
contrast, ‘Private’ Limited companies are private limited-liability companies whose shares cannot
be listed. The vast majority of the new firms in our sample are incorporated as Private Limited
companies and new firms with this legal form account for 76.5% of the assets added to
manufacturing by all new firms. In comparison to Private Limited new firms, Public Limited
new firms are larger, less profitable, use more inside equity, and are more likely to have parent
companies. Last, there is also a large variation across industries in the number of new firms, the
value of the assets they add to the economy, the fraction of them with parent companies, their
size, their profitability, and their inside equity (see Table A1 in the Online Appendix).
We are unable to calculate the profitability and inside equity of new firms in Ireland, Latvia, Lithuania, and Russia
due to missing data. These countries drop from our tests that use profitability or inside equity measures.
3
13
In sum, there is large variation in the ownership structure, size, profitability, and inside
equity of new firms across countries, industries, and legal forms. Factors which are the source of
these three levels of variation could cause an association between the ownership structure, size,
profitability, and inside equity of new firms for reasons other than the financing advantage of
pyramidal ownership links and hence must be controlled for in our tests.
3.6. Empirical Method
We measure the differences between the characteristics (e.g., size or profitability) of new firms
with parent companies and stand-alone ones using non-parametric matching. For each new firm
with a parent company, we find the set of stand-alone new firms matched exactly on country of
incorporation, three-digit ISIC industry affiliation, legal form of incorporation, firm age since
incorporation, and calendar year. We then compute the average difference in the characteristic of
interest across the two types of new firms within each country-industry-legal form-age-calendar year
cell.4 To obtain meaningful comparisons, our matching requires the presence of the two types of
new firms in many cells, i.e., a large ‘common support.’ This condition is satisfied in our dataset.
By allowing firms to enter our sample of new firms as long as their age is in the range one to
three years old, we obtain a large number of matches within cells. To see why, consider, for example,
a new firm with a parent company observed for the first time in 2006 with age three. Our approach
compares it with all stand-alone new firms that have age three in 2006 in the same cell, regardless of
when they are first observed in our data. If we keep in the sample only one observation per firm, for
example, the year the firm is first observed in the data, the same new firm with a parent company
can be matched only to the subset of new stand-alone firms in the same cell that are first observed
in the data in 2006. In Section 6.5, we show that our results are robust to defining the sample of new
firms using alternative approaches that use only one observation per firm.
The variation left in the data after the matching reflects differences in the types of projects
undertaken by new firms with parent companies and stand-alone ones, which are at the heart of
the organizational decision we want to study. Specifically, our matching approach ensures that
differences in legal and tax codes or access to capital across countries, industries, or forms of
incorporation (whether they are time-varying or not) do not drive our results. Noteworthy, a
common concern in studies using international samples is that cross-country differences in
financial development, investor protection, tax codes, and regulation affect organizational
decisions and firm entry. But our evidence relies solely on the variation in firm characteristics
4
We implement the exact matching using the STATA command ‘psmatch’ of Leuven and Sianesi (2003).
14
across new firms with parent companies and stand-alone ones within country-industry-legal
form-age-calendar year cells. Also, using this approach, differences in the coverage of new firms
across countries cannot drive our results.
A new firm’s legal form is arguably a choice the owner makes at the time of incorporation.
Nevertheless, we match on legal form, because incorporation under the Public Limited form is
typically more expensive, comes with extra disclosure requirements, could be required by law in
certain cases, and is typically associated with larger firms. Our aim is to control for these effects
as well as for any differential treatments of the two legal forms in bankruptcy that could be
related to firm size (see Section 5.3.1). In Section 6.4, we show that our results hold and the
estimates are larger if we do not match on legal form.
4. Results
4.1. Size of New Firms
Table 4 reports the differences in the size of new firms with parent companies and standalone ones matched on country, industry, legal form, age, and calendar year. In Panel A, we
compare all new firms with parent companies to stand-alone ones. The Total Assets (Fixed Assets)
of new firms with parent companies exceed those of stand-alone ones by €3,444.9 (€1,568.3)
thousand. These differences are statistically significant (with t-statistics of 43.12 and 36.40,
respectively) and also economically significant. When measured by total assets (fixed assets), new
firms with parent companies are 6.1 (6.8) times larger than stand-alone ones. These results
support the view that parent companies set up new firms with larger investment requirements.
In Panels B and C, we distinguish parent companies affiliated with business groups from
unaffiliated ones. Specifically, in Panel B, we match new firms whose parent companies are
affiliated with business groups to stand-alone new firms and in Panel C we match new firms
with unaffiliated parent companies to stand-alone new firms. Regardless of whether a new firm’s
parent company is affiliated with a business group or not, new firms with parent companies are
larger than stand-alone ones. This result holds for both measures of firm size and is statistically
and economically significant. In summary, the evidence suggests that parent companies set up
new firms with larger investment requirements both inside and outside business groups.
Parent companies affiliated with business groups typically command more resources than
unaffiliated ones. Hence, they should be able to set up new firms with larger investment
requirements. To assess this argument, in Panel D, we compare new firms with affiliated parent
companies to matched new firms with unaffiliated ones. Supporting this view, the Total Assets
15
(Fixed Assets) of new firms with affiliated parent companies exceed those of new firms with
unaffiliated ones by €6,268.7 (€3,113.5) thousand. These differences are statistically significant.
4.2. Profitability
4.2.1. Profitability of New Firms
Table 5 compares the profitability of new firms with parent companies and matched standalone ones. Panel A shows that the EBITDA/Total Assets (EBIT/Total Assets) of new firms with
parent companies is 4.5 (3.9) percentage points lower than it is for matched stand-alone ones.
These differences are statistically significant, with t-statistics of 15.95 and 13.13, respectively.
They are also economically significant as they imply that the profitability of new firms with
parent companies is 34.4% (68.4%) lower than it is for stand-alone ones. These results suggest
that parent companies set up new firms with lower pledgeable cash flows.
In Panel B we compare new firms whose parent companies are affiliated with business
groups to matched stand-alone new firms, and in Panel C we compare new firms with
unaffiliated parent companies to matched stand-alone new firms. We find that, regardless of
whether a new firm’s parent company is affiliated with a business group or not, new firms with
parent companies are less profitable than stand-alone ones. This result is statistically and
economically significant, and it holds for both measures of profitability. Hence, the evidence
suggests that parent companies set up new firms with low pledgeable cash flows both inside and
outside business groups.
In Panel D, we compare new firms with affiliated parent companies to matched new firms
with unaffiliated ones. The profitability of new firms with affiliated parent companies is 1.2
percentage points lower than it is for new firms with unaffiliated ones when measured by
EBITDA/Total Assets, and 0.8 percentage points lower when measured by EBIT/Total Assets.
The first difference is statistically significant. This evidence is consistent with the view that,
because parent companies affiliated with business groups govern more resources than
unaffiliated ones, they are able to set up new firms with lower pledgeable cash flows.
4.2.2. Age Profiles of Reported Profitability
Our tests so far use the difference in the initial reported profitability of new firms with
parent companies and matched stand-alone ones to gauge the difference in the present value of
their future pledgeable cash flows as of the time of incorporation. Our approach is valid
provided that, within country-industry-legal form-age-calendar year cells, the two types of firms
16
have similar discount rates and the difference in reported profitability observed shortly after
incorporation persists as firms grow older.
We cannot calculate discount rates, because there are no market prices of debt and equity
available for the firms in our sample. A new firm’s cost of capital depends on the systematic risk
of its cash flows, which is largely driven by the nature of the firms’ business and the economic
environment in which it operates. For example, it is a common practice to estimate a firm’s cost
of capital using the firm’s peer (comparable) firms. Since our tests compare new firms with
parent companies and stand-alone ones within country-industry-legal form-age-calendar year
cells, the within-cell differences in the cost of capital between the two types of new firms, which
are relevant for our inferences, should be minimal. Therefore, the difference in the present
values of the pledgeable cash flows between the two types of new firms at incorporation should
be largely driven by the difference in their expected pledgeable cash flow streams.
The main concern is that the initial difference in profitability can be reversed as firms grow
older and hence the firms with higher initial profitability could be those with a lower present
value of pledgeable cash flows. To address this concern, we study whether the difference in
reported profitability at incorporation persists as firms grow older. Since future profits are
unobservable and our short panel data set does not allow us to follow new firms over many
years, we estimate the age profiles of the reported profitability of new firms with parent
companies and that of stand-alone ones using the sample of all manufacturing firms in the
Amadeus database during the period 2001-2006, regardless of age (a total of 537,532 firm-year
observations).5 The assumption we invoke is that old firms’ profitability observed now tells us
what the profitability of currently young firms will be when they reach older ages. This approach
is used in the labor economics literature to estimate the age profiles of worker’s productivity and
wages using cross sectional data or short panels (e.g., Hellerstein, Newmark, and Troske, 1999).
Specifically, we run the following OLS regression:
EBITDA / TotalAsset sij      PCij    a  PCij  Ageija   a  1  PCij  Ageija   j   ij ,
20
20
a 1
a 1
(1)
where i and j denote firm and country-industry-legal form-calendar year cell, respectively. PCij
equals one if the firm has a parent company and zero otherwise; Ageija equals one if the firm is a
We also estimate the age profiles using a shorter panel containing solely new firms since their year of
incorporation until the last year we observe them in our data. In this sample, we are only able to estimate the age
profiles over ages 1-5, and over this age range we find similar results (see Table A3 in the Online Appendix).
5
17
years old and zero otherwise (a = 1,…,20); and  j is the full set of country-industry-legal formcalendar year fixed effects. The age of more than 20 years is the base group.
In Fig. 1, we plot the estimates of    a for firms with parent companies and of  a for
stand-alone firms in each age category a (Table A2 in the Online Appendix reports the estimated
coefficients and their standard errors). In other words, the figure reports the ‘average’ age
profiles of reported profitability of the two types of firms in excess of the reported profitability
of stand-alone firms older than 20 years, measured conditionally on the firms being in the same
country-industry-legal form-calendar year cell. The vertical distance between the profiles
captures the difference in the reported profitability of firms with parent companies and standalone ones at each age category (i.e.,    a   a ).
The age profile of the reported profitability of firms with parent companies is rapidly
increasing over ages one to six and flat over ages seven and higher, while the age profile of the
reported profitability of stand-alone firms is somewhat decreasing. The gap between the two
profiles decreases with age, but the reported profitability of firms with parent companies always
remains below that of stand-alone ones. The age profiles are similar if we break down firms with
parent companies into those affiliated with business groups and those unaffiliated (see Fig. A1.a
and Fig. A1.b in the Online Appendix). Hence, the initial difference in reported profitability is
not subsequently reversed, which supports the theory’s prediction that new firms with parent
companies have a lower present value of pledgeable cash flows when they are set up.
4.3. Inside Equity Financing and Parent Companies’ Retained Earnings
The mechanism behind the financing advantage of pyramidal ownership links is that the
family supplies the new firm with more inside funds when it sets it up indirectly through a
parent company than when it sets it up as a stand-alone firm with direct family control. The
reason is that the family can supply the new firm with the parent company’s entire stock of
retained earnings rather than only its share. Hence, an important implication of the theory is that
new firms with parent companies should be endowed with a larger amount of ‘inside equity’, i.e.,
equity supplied by new firms’ controlling owners, than stand-alone new firms.
In Table 6, we compare the amounts of inside equity (in EUR thousand) and the inside
equity-to-total assets ratios of new firms with parent companies and matched stand-alone ones
(the approach we use to calculate a new firm’s inside equity is described in Section 3.3).
Supporting the above prediction, Panel A shows that the inside equity of new firms with parent
companies is €327.6 thousand and that of stand-alone ones is €34.9 thousand. This ten-fold
18
difference is highly statistically significant. The theory’s prediction concerns the amounts of
inside equity but, since the two groups of firms differ in size, we examine whether these
differences persist after scaling by total assets. The inside equity-to-total assets ratio is 10.8% for
new firms with parent companies and 7.7% for stand-alone ones. This 3.1 percentage point
difference is highly statistically significant and also economically significant. The inside equity-tototal assets ratio of new firms with parent companies is 40.3% higher. Panels B and C show that
the difference in inside equity financing between new firms with parent companies and standalone ones is present regardless of whether the parent companies are affiliated with business
groups or not. Last, Panel D further shows that both the amounts of inside equity and the inside
equity-to-total assets ratios of new firms with affiliated parent companies are larger than those of
new firms with unaffiliated parent companies. This suggests that larger organizations provide
both larger absolute and relative amounts of inside equity to the new firms they set up.
The theory also suggests that parent companies with more retained earnings can supply new
firms with more inside funds. In Table 7, we split the sub-sample of new firms with parent
companies into new firms whose parent companies have retained earnings above and below the
sample median. We then use matching to compare the amounts of inside equity and the inside
equity-to-total assets ratios between the two groups of new firms. Consistent with the prediction
of the theory, we find that new firms whose parent companies have high retained earnings
receive significantly larger amounts of inside equity. Their inside equity-to-total assets ratios are
also higher, but the difference is not statistically significant.6
In summary, we find that new firms with parent companies rely significantly more on inside
equity financing, especially when the parent companies have more resources. This evidence
provides support for the key mechanism through which pyramidal structures alleviate the
financing constraints of new firms – the ability to provide them with inside funds.
4.4. Technology
We now study whether there are differences in the production technologies used by new
firms with parent companies and stand-alone ones. New firms whose operations rely heavily on
fixed assets and on expensive labor often have large investment requirements and thus large
needs of inside funds. This suggests that, if pyramidal structures provide a financing advantage
as suggested by the theory, capital-intensive new firms and those using expensive labor should
New firms whose parent companies have high retained earnings are much larger (see Table A4 in the Online
Appendix). This is supports the view that larger amounts of retained earnings help setting up larger new firms.
6
19
be set up with parent companies. In contrast, labor-intensive new firms and those that rely on
cheap labor should be set up as stand-alone ones. However, one can also argue that higher
capital-labor ratios could facilitate new firms’ access to external finance because fixed assets are
easier to pledge to creditors. If this is especially beneficial for new stand-alone firms, we should
observe that they are more capital intensive than new firms with parent companies.
In Table 8, we compare the capital-labor ratio and wage per employee of new firms with
parent companies to those of matched stand-alone ones. Panel A shows that new firms with
parent companies use different production technologies than stand-alone ones. New firms with
parent companies have fixed assets of €45.0 thousand per employee while stand-alone new firms
have only €29.8 thousand per employee. This difference of €15.2 thousand per employee is
highly statistically significant (t-statistic 16.23). It is also economically significant, as it implies
that the capital-labor ratio of new firms with parent companies is 51.0% larger than it is for
stand-alone new firms. New firms with parent companies pay an average annual wage of €37.2
thousand per employee while stand-alone new firms pay only €31.5 thousand. The difference of
€5.7 thousand is statistically significant (t-statistic 18.73) and economically significant. The
average annual wage paid by new firms with parent companies is 18.2% higher than that paid by
stand-alone new firms. These results suggest that parent companies set up new firms with large
needs of inside funds stemming from the nature of their production technologies.
In Panels B and C, we break new firms into those whose parent companies are affiliated
with business groups and those with unaffiliated parent companies, and compare each group to
matched stand-alone new firms. New firms with parent companies are more capital intensive
and pay higher wages relative to matched stand-alone new firms, regardless of whether their
parent company is affiliated with a business group or not. This suggests that parent companies
set up new firms with different technologies both inside and outside of business groups.
In Panel D, we compare new firms whose parent companies are affiliated with business
groups to matched new firms with unaffiliated parent companies. The capital-labor ratio and
average wage per employee are larger for new firms with affiliated parent companies. These
differences are statistically and economically significant. Hence, given their ability to provide
large amounts of inside funds, business groups play an important role in the financing of new
firms whose production technologies are associated with large financing needs.
20
4.5. Discussion of Results
The evidence in this section shows that, compared to matched stand-alone new firms, new
firms with parent companies (i) are much larger, (ii) have lower present value of pledgeable cash
flow, (iii) rely more on inside equity financing, especially when the parent companies have more
resources, and (iv) are more capital intensive and pay higher wages. These results hold
independently of whether the parent companies setting up the new firms are affiliated with
business groups or not. Last, compared to new firms set up by parent companies not affiliated
with business groups, those set up by parent companies affiliated with business groups are
larger, have lower pledgeable cash flow, receive more on inside equity financing from their
controlling owners, are more capital intensive, and pay higher wages.
These results strongly support the theory that parent companies use the financing advantage
of pyramidal ownership links, which allows them to supply more inside funds, to set up new
firms with larger investment requirements and lower present value of pledgeable cash flows. In
other words, the results are consistent with the view that new firms ‘self select’ into ownership
structures which alleviate their financing constraints at the time they are set up. Interestingly,
parent companies play an important role in the financing of new firms both inside and outside
business groups, and thus are an important underpinning of entrepreneurial activity. Our
evidence also shows that, due to their command of larger pools of resources, larger
organizations, such as business groups, can set up new firms with larger investment needs.
5. Alternative Explanations
We now examine whether some of our results could be due to reasons other than the
financing advantage of Almeida and Wolfenzon (2006a) described in Section 2. Noteworthy,
unlike the financing advantage of pyramids, none of the various alternative explanations we
entertain below can account for all our results. However, alternative stories could partially
explain some of our results.
5.1. Diversion of Profits
New firms with parent companies might report lower profitability than stand-alone ones if
their controlling owners divert more cash flows to themselves.7 In firms with parent companies,
the wedge between controlling owners’ cash flow and control rights resulting from pyramidal
ownership gives controlling owners incentives to tunnel cash flows towards firms in upper layers
Prior work on business groups suggests that pyramidal ownership reduces firm performance due to diversion
(e.g., Bertrand, Mehta, and Mullainathan, 2002; Bae, Kang, and Kim, 2002; Baek, Kang, and Lee, 2006).
7
21
of the pyramid. Also, the controlling owners of firms with parent companies may directly extract
more private benefits. Below, we provide two tests that provide evidence against the diversion
of profits hypothesis in our sample of new firms.
Our first test examines whether the reported profitability of new firms with parent
companies is responsive to controlling owners’ diversion incentives measured by the wedge
between their cash flow and control rights. This test cannot directly reject the view that there is
more diversion in new firms with parent companies than in stand-alone ones; however, it shows
whether more diversion of profits, and thus lower reported profitability, occurs in firms with
larger diversion incentives provided by a higher wedge.
To this end, in Table 9, we use the sample of new firms with parent companies and regress
reported profitability (EBIDTA/Total Assets) on the difference between controlling owners’
control and cash flow rights (Wedge) and control variables (Log(Total Assets), Age, Tangibility, and
Leverage). In columns (1)-(3), we report the results of cross-sectional tests with a full set of
country-industry-legal form-calendar year fixed effects and different sets of control variables.
The estimated coefficient on Wedge is not statistically significant in any specification. In columns
(4)-(6), we extend the sample of new firms to create a panel by following each new firm since its
year of incorporation until the last year we observe it in our data. We report the results of panel
regression tests with firm fixed effects, year fixed effects, and control variables. The estimated
coefficient on Wedge is again never statistically significant. The results are similar if we define
Wedge as the controlling owner’s control rights divided by cash flow rights (see Table A6 in the
Online Appendix). In sum, using both cross-sectional and within-firm tests, we find no
significant relation between the reported profitability of new firms with parent companies and
the measure of diversion incentives. The evidence from this test is against the view that the
diversion incentives due to pyramidal structures lead to lower reported profitability and hence it
alleviates the concern that new firms with parent companies are less profitable than stand-alone
ones due to diversion.
In our second test, we use the approach in Bertrand, Mehta, and Mullainathan (2002) to test
whether the controlling owners of new firms with parent companies divert more profits. Those
authors and others provide evidence of diversion in pyramidal structures consisting of large
publicly traded firms, but no prior work studies whether diversion occurs in newly-incorporated
private firms like those in our sample. The intuition of the test is that, if there is more diversion
in new firms with parent companies than in stand-alone ones, then their reported profits should
22
be less sensitive to exogenous shocks to their own profitability because a larger fraction of the
profitability increase is diverted. Hence, we estimate the following regression:
EBITDAijt      PEBITDAijt    PCij  PEBITDAijt    Xijt    Xijt   i   t  ijt ,
(2)
where i indexes firm, j indexes industry, and t indexes year. EBITDAijt is earnings before interest,
taxes, depreciation, and amortization. PEBITDAijt is the predicted EBITDAijt in the absence of
diversion, calculated, for each firm, as the total assets-weighted average of the EBITDA/Total
Assets for all firms in the same country-industry-calendar year cell (other than itself) multiplied
by its total assets (provided that there are at least 10 other firms in the same cell). PCij equals one
if the firm has a parent company and is zero otherwise, and Xijt is a vector of control variables.
The firm and year fixed effects are denoted  i and  t , respectively. In this specification, 
captures the average sensitivity of all firms’ profits to the shocks, while  captures the
differential sensitivity of firms with parent companies. If there is more diversion in firms with
parent companies,  should be negative.8
In Table 10, we report the results for two panel-data samples that consist of firms with
parent companies and stand-alone ones over the period 2001-2006. The sample in columns (1)
and (2) contains new firms since their year of incorporation until the last year we observe them
in our data. The sample in columns (3) and (4) contains mature firms (i.e., all ‘non-new’ firms
defined as the complement of the sample of new firms in the Amadeus database). The estimates
of  are not statistically significant in the sample of new firms. Nevertheless, consistent with
prior evidence of diversion in pyramidal structures consisting of well-established public firms,
the estimates of  are negative and statistically significant in the sample of mature firms. Hence,
there is no evidence of more diversion among firms with parent companies in the sample of new
firms, but there is in the sample of mature firms. This might occur, for example, because new
firms do not have free cash flows or their managers are better monitored.
5.2. Life Cycle of Entrepreneurs
Almeida and Wolfenzon (2006a) show that all new firms with positive pledgeable NPV can
raise enough external financing and hence are always set up as stand-alone ones, both by the
entrepreneur who owns an existing firm and by the one who does not (see Result 4). Therefore,
staying strictly within their theory, the distinction between the two different types of
By including firm fixed effects, we estimate the effect of a shock to a firm’s profit (i.e., of a change in a firm’s
predicted profit) on its profit. The fixed effects also control for unobservable differences in the attributes of firms
with parent companies and stand-alone ones, and capture any average differences in their profits.
8
23
entrepreneurs is not essential for our tests. However, our inferences could be affected if the two
types of entrepreneurs set up new firms with different ownership structures for reasons that are
outside of the theory. In particular, an entrepreneur who does not own an existing firm can only
set up the new firm – her first venture – as a stand-alone firm and such new firm is typically
small. Over time, she may learn about her ability and set up subsequent ventures that are larger,
some as stand-alone firms and some pyramidally using the retained earnings of her first firm
(even if they could be set up as stand-alone firms). It is then possible that, due to this ‘life cycle
of entrepreneurs,’ in our data, the group of new stand-alone firms comprises all ‘first ventures’
as well as some ventures set up by entrepreneurs at later stages of their life cycles while the
group of new firms with parent companies contains only later ventures. This could cause standalone new firms to be of a smaller average size than new firms with parent companies.
To explore this possibility, we refine our tests by excluding from the sample those standalone new firms whose shareholders do not own any pre-existing firms at the time the new firm
is incorporated. In this subsample, the shareholders clearly had a choice between setting up the
new firm pyramidally or as stand-alone, and this choice cannot be driven by the stage of the
entrepreneur’s life cycle described above. To decide whether a new firm’s shareholders also own
a pre-existing firm, we proceed as follows. First, for each stand-alone new firm, we create a list
of names of all shareholders in the combined Amadeus/Orbis dataset. Second, using this list,
for each stand-alone new firm, we search the full dataset to identify equity investments by these
shareholders in previously incorporated firms. Last, we discard from the sample those standalone new firms whose shareholders have no equity stakes in pre-existing firms.
In Table 11, we report the estimated differences in the main characteristics between new
firms with parent companies and stand-alone new firms whose shareholders own at least one
pre-existing firm at the time the new firm is incorporated. We continue to find that new firms
with parent companies are larger, less profitable, have more inside equity financing, are more
capital intensive, and pay higher wages than matched stand-alone ones. Hence, our results
cannot be explained by the life cycle of entrepreneurs hypothesis.
5.3. Legal and Tax Issues
5.3.1. Country, Industry, and Legal Form
Legal factors (e.g., the degree of investor protection or the regulation of takeovers), tax
rules, and the degree of financial development differ across countries and within one country
over time. In addition, regulation of business activities could differ across countries and also
24
across industries within a country, possibly over time. It could be that the organizational
decisions underlying the creation of new firms are affected by legal factors, tax rules, or the
degree of financial development. However, this does not affect our inferences, as our results rely
solely on the variation in firm characteristics across new firms with parent companies and standalone ones within country-industry-legal form-age-calendar year cells.
The matching on legal form of incorporation controls for additional legal or tax issues that
could vary with legal form, like a possibly different treatment in bankruptcy or the fact that
incorporation under the Public Limited form is more expensive and comes with extra disclosure
requirements. In Section 6.4, we explore the effect of matching on legal form on our results.
5.3.2. Tax Implications of Different Organizational Decisions
It could be that, within country-industry-legal form-age-calendar year cells, setting up a new
firm through a parent company has different tax implications for the controlling owner than
setting it up as a stand-alone firm. For example, if direct control were more tax efficient, then
more profitable firms would be set up as stand-alone firms and this could drive our profitability
result. However, given the tax code that governs intra-company dividends in Europe, this is
unlikely to be the case. As noted by Morck (2005), intra-company dividends are rarely taxed
outside the United States and, in particular, the European Commission’s Parent-Subsidiary
Directive explicitly forbids European Union members from taxing intra-company dividends
(European Union members account for the vast majority of the new firms in our sample). In
fact, pyramidal structures could allow the controlling owners to minimize taxes through transfer
pricing, the use of thin-capitalization companies, or the registration of holding companies in tax
heavens (Masulis, Pham, and Zein, 2011). This suggests that it is likely more tax efficient for
controlling owners to set up more profitable firms pyramidally, and hence tax issues cannot
explain why new firms with parent companies are less profitable than stand-alone ones.
5.3.3. Tax Offsets from Acquisitions of Existing Firms that are Re-Incorporated
The large number of newly incorporated firms with small size suggests that new firms with
parent companies in our sample are startups. The sample might also contain some new firms
with parent companies that result from the acquisition of an existing mature firm by another
company and its subsequent re-incorporation as a new firm. This can occur, for example, if the
controlling owner of a company acquires a firm with accumulated losses to reduce the
organization’s tax bill. If acquisitions of mature firms to reduce taxes followed by the
25
reincorporation of the resulting entities as new firms are prevalent in our sample, then new firms
with parent companies could have lower profitability and larger size than stand-alone ones.
To address this possibility, we distinguish startups from acquired firms using BvD’s Zephyr
database, which tracks M&A deals in Europe. If an acquired firm is re-incorporated, the new
firm’s identification number is not recorded in Zephyr, and thus we cannot identify it in
Amadeus. However, Zephyr allows us to separate parent companies that act as acquirers from
those that do not. To be conservative, we classify a new firm as a startup if none of the firms to
which it is linked directly or indirectly through ownership acted as an acquirer in 2000-2007 (the
window includes one year before the beginning and one year after the end of our sample
period); otherwise we classify it as dubious. Three quarters of new firms with parent companies
are startups and the rest are dubious. The median total assets of dubious new firms are €4.67
million and the median total assets of startups are €0.70 million. Also, dubious new firms
account for 70% of new firms whose parent companies are affiliated with business groups and
for only 18% of new firms whose parent companies are unaffiliated. These statistics suggest that
business groups are more likely to expand by setting up new firms through acquisitions.
In Table 12, we report the estimated differences in the main characteristics between startups
with parent companies and matched stand-alone new firms. Consistent with our earlier results,
startups with parent companies are larger, less profitable, have more inside equity, are more
capital intensive, and pay higher wages, than matched stand-alone new firms. The magnitudes of
the differences are similar to those reported in previous tables using the full sample of new
firms. The exception is the size difference, which is still statistically significant but smaller in
magnitude. This is because large new firms with parent companies are often classified as dubious
and excluded from the sample. In sum, our findings are not due to the presence of new firms
with parent companies that could result from tax-driven acquisitions in our sample.
5.4. Cooperation in Product Markets
Parent companies may finance larger and/or less profitable new firms if this creates benefits
from cooperation in product markets. Cooperation between firms typically occurs along supply
chains because ownership stakes among vertically related firms can mitigate hold up problems
(see Grossman and Hart, 1986 and the empirical evidence in Allen and Phillips, 2000).
26
Cooperation could also exist between new firms and parent companies that operate in the same
industry.9
To explore this possibility, we identify those new firms in our sample that exhibit potential
for cooperation in product markets with their ultimate corporate shareholders. As in Alfaro and
Charlton (2009), we consider both the potential for horizontal cooperation, i.e., between firms in
the same industry, and for vertical cooperation, i.e., between firms related by supply chains.
Specifically, we classify a new firm with a parent company to exhibit potential for horizontal
cooperation if both the new firm and its ultimate corporate shareholder are in the same fourdigit ISIC industry. We identify the potential for vertical cooperation using the Input-Output
matrix for the UK in 2005, under the assumption that the input-output relations among UK
industries are similar in other European countries.10 For each industry, we create a list of its
significant supplier industries that contains all industries from which its purchases account for at
least 2% of its output, and a list of its significant customer industries that contains all industries
to which it sells at least 2% of its output. We then classify a new firm to exhibit potential for
vertical cooperation with its ultimate corporate shareholder if the two firms are related through
supplier or customer relations (or both) as indicated by the supplier and customer lists.
Table 13 reports the differences in size, profitability, inside equity, and technology between
new firms with parent companies and matched stand-alone ones, after dropping from the
sample those new firms with potential for either horizontal or vertical cooperation in product
markets with their ultimate corporate shareholders. The results remain similar to those reported
for the full sample in Section 4, and suggest that the decisions about how to set up new firms are
unlikely to be driven by a need to establish cooperation in product markets. The results are also
similar if we use higher cutoffs to identify the potential for vertical cooperation (e.g., 3%, 5%, or
10%) and thus keep more new firms with parent companies in the sample.
5.5. Differential Data Quality
Small firms typically report their ownership structures more sparsely than large firms and
one can also expect the reported ownership structures of small firms to be more often
Since we focus on small closely held private firms, the organizational decision about how to set up a new firm is
unlikely to be driven by a need to stimulate cooperation in product markets. When the controlling owner of an
existing firm sets up a new firm, she retains control over the new firm regardless of whether she chooses direct
ownership or indirect ownership through a pyramidal link. Hence, she can achieve cooperation in product markets
between the existing firm and the new firm with both organizational structures.
10
The matrix is not available for many other countries and UK firms represent a large fraction of our sample. The
2005 matrix is the most recent and it overlaps with our sample period. We convert the ISIC industry codes used by
firms in our data to the codes used by the UK input-output matrix using the concordance table from Eurostat.
9
27
incomplete. This could make us incorrectly classify some small new firms with parent companies
as stand-alone firms, because we are unable to identify their unreported corporate owners. If this
were the case, then new firms with parent companies would appear to be larger because the
smaller ones are misclassified as stand-alone firms. Fortunately, the presence of corporate
owners in small new firms’ ownership structures is well covered in our data. The reason is that,
even if a new firm does not disclose its parent company, the parent company typically faces
disclosure requirements on its equity stakes in subsidiaries.
In Table 14, we further address this issue by comparing new firms with parent companies to
the subsample of new firms that are classified as stand-alone ones on the basis of virtually
complete ownership data (we require disclosure of 90% of ownership). This does not affect our
results. Hence, differential data quality does not affect the magnitude of the differences in
characteristics between new firms with parent companies and stand-alone ones. Our conclusions
are similar if we require 100% disclosure of ownership in stand-alone firms (see Table A6 in the
Online Appendix).
5.6. Market Power or Political Influence
Morck, Wolfenzon, and Yeung (2005) note that pyramidal structures allow control over
corporations without making commensurate capital investments and, through this mechanism,
allow wealthy families to ultimately control a large proportion of some countries’ economies. In
this context, families could create pyramidal links to acquire significant market power and
political influence rather than to make use of the financing advantage they provide.
However, we show that pyramidal ownership is pervasive among much smaller
organizations whose controlling owners do not command enough resources to be able to seek
market power or political influence. Our results suggest that pyramidal links provide financing
advantages in the growth of small pyramidal organizations whose objectives are unrelated to
those often associated with the expansion of powerful business groups.
6. Robustness Checks
In this Section, we assess the robustness of our main results, namely, those on the
differences in size, profitability, inside equity, and technology between new firms with parent
companies and matched stand-alone ones. The results are in the Online Appendix.
28
6.1. New Firms Incorporated in the UK and Outside the UK
In the UK, firms are required to file their accounting information with the Companies
Registry within ten months of their fiscal year end. Since there is virtually full compliance,
Amadeus contains the entire population of UK firms. There is less compliance with similar
disclosure requirements in the other countries and hence new firms incorporated in the UK
account for about half of the new firms in our sample. New UK firms are on average
significantly smaller than those in other countries, as even the smallest firms are covered.
To study whether our results are sensitive to an incomplete coverage of new firms, we
repeat our main tests separately for subsamples of new firms incorporated in the UK and
outside the UK (see Table A7). In both subsamples, we find statistically and economically
significant evidence that new firms with parent companies are larger, less profitable, use more
inside equity, are more capital intensive, and pay higher wages compared to matched stand-alone
new firms. The estimated differences are larger in the subsample of UK firms that has complete
coverage. Noteworthy, the size difference is larger in the UK because, while new firms with
parent companies are typically larger and thus usually well covered in most countries, small
stand-alone new firms are better covered in the UK compared to other countries.
A direct comparison of the differences in the characteristics of new firms with parent
companies and stand-alone ones estimated in the UK with those estimated outside the UK (and
across countries in general) is not possible, as one cannot disentangle the impact of varying
coverage of new firms in Amadeus from the effect of cross-country heterogeneity in financial
development, investor protection, or barriers to entry. The advantage of our approach, which
compares firms within countries, is that it diminishes the effect of coverage quality on the
estimates. However, we cannot reliably estimate how country-level factors affect the differences
between the characteristics of new firms with parent companies and stand-alone ones.
6.2. Shell Parent Companies
Some parent companies in our sample could be ‘shell’ companies with no real economic
activity. Specifically, it could be that an entrepreneur sets up a fully owned shell company and
supplies her funds to a new firm through this shell company. In this case, the funds the new
firm receives from the parent shell company come from the entrepreneur’s wealth and not the
retained earnings of the parent company. Such pyramidal organization is practically equivalent to
a stand-alone new firm. Hence, our inferences could be confounded by the presence of shell
parent companies in our sample. We now address this possibility.
29
To identify firms with no real economic activity, we follow the SEC’s definition of ‘shell’
companies11 as well as anecdotal evidence on the characteristics of European shell companies
that have recently gone public in the U.S. We classify as suspect shells those parent companies
that satisfy two conditions: i) the only reported shareholder is a single individual who owns at
least 90% of the shares (results are similar if we require 100% ownership) and ii) cash and
equivalents account for 50% or more of total assets and either their total assets are less than
€20,000 or their annual sales are less than €10,000.12
We repeat our main tests by comparing the characteristics of new firms whose parent
companies have real operations (i.e., are not suspect shells) to the characteristics of matched
stand-alone new firms (see Table A8). The results are similar to those obtained using the full
sample of new firms with parent companies. They are also similar if we relax/strengthen our
definition of suspect shell parent companies by lowering/increasing the cutoffs on total assets,
sales, or the cash-to-assets ratio. In summary, our inferences are not driven or confounded by
having new firms whose parent companies could be shell companies in the sample.
6.3. New Firms in Industries with High and Low Enterprise Death Rates
In Section 4.2.2, we compare the age profiles of the reported profitability of firms with
parent companies and stand-alone ones, but we only observe firms’ profitability conditional on
their survival. The interpretation of our results could be affected if new firms with parent
companies and stand-alone ones have systematically different death rates. For example, it could
be that stand-alone new firms have higher death rates for a given level of profitability, because
lenders are more likely to terminate poorly performing firms when they are stand alone. If so,
the observed profitability of stand-alone new firms is higher than that of new firms with parent
companies, even if the two types of firms undertake the same projects.
To study to what extent survivorship affects our results, we re-estimate the age profiles of
the reported profitability of firms with parent companies and stand-alone ones separately for
industries with enterprise death rates above and below the sample median. An industry’s
enterprise death rate is defined as the time-average of the ratio of the number of enterprise
Under Rule 144(i) a ‘shell’ company is defined as a registrant with no or nominal operations and either no or
nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and
cash equivalents and nominal other assets (‘nominal’ means of no value or doubtful value).
12
The choice of the cutoffs is conservative, since the European shell companies which have attracted attention in
the U.S. have significantly less valuable assets and no reported sales (see a recent article in the Wall Street Journal,
“The SEC’s Russian Roulette”, June 29, 2010, by J. R. Emshwiller and K. Scannell). Hence, we are likely to classify
as suspect shells some parent companies with real operations.
11
30
deaths in a year and the number of active enterprises in that year. The death rates are calculated
at the two-digit ISIC level using census data from Eurostat’s Structural Business Statistics for the
countries in our sample. We find that the age profiles are qualitatively similar across industries
with high and low enterprise death rates and they are also consistent with those obtained using
the full sample (see Fig. A2.a and Fig. A2.b). In summary, our results are robust to exaggerating
as well as to minimizing survivorship.
6.4. Matching Approach
Our tests compare the characteristics of new firms with parent companies and stand-alone
ones matched exactly on country, industry, legal form, age, and calendar year, i.e., within the
same country-industry-age-legal form-age-calendar year cell. An alternative approach is to match
on the propensity score estimated using these covariates. With this approach, observations in
different cells could obtain the same propensity scores, leading to a larger common support by
including inappropriate matches. Nevertheless, for robustness, we repeat our key tests using
propensity score matching (see Table A9). The common support becomes larger, but the results
are qualitatively similar to those obtained using exact matching (the estimated differences in firm
characteristics are generally larger in magnitude and more statistically significant).
We match on legal form, but this is questionable because legal form is a choice at the time
of a new firm’s incorporation that could be related to size or profitability. For example, suppose
that the size distributions of new firms with parent companies and stand-alone ones are
identical, but small-stand alone firms and all firms with parent companies choose one legal form,
while large stand-alone firms choose the other. In this case, by matching on legal form we would
spuriously find that new firms with parent companies are larger on the common support under
the first form (the common support under the other legal form would be empty). Table 3 shows
that most new firms are incorporated as Private Limited, but that there is a large common
support under both legal forms. Nevertheless, we repeat our key tests i) not matching on legal
form and ii) restricting attention only to new firms incorporated as Private Limited. In both
cases, the results are similar to those reported earlier (see Tables A10 and A11).
6.5. Number of Observations per New Firm in the Sample
As discussed in Section 3.6, a firm enters our sample of new firms with the number of
observations equal to the number of years the firm is observed with age in the range one to
three years old during our sample period (i.e., up to three observations per new firm). Our
matching method compares new firms with parent companies to new stand-alone firms in the
31
same country-industry-legal form-age-calendar year cell. For robustness, we repeat our main
tests using the same matching method, but using alternative samples of new firms that only
contain one observation per firm. In Table A12, the sample of new firms contains only the first
year a firm is observed in the data with age in the range one to three years old. The sample size
is smaller due to a smaller common support, but the results are similar to our main results. In
Table A13, the sample of new firms alternately includes only those with age one, only those with
age two, and only those with age three. The results remain similar in all cases.
7. Concluding Remarks
We test Almeida and Wolfenzon’s (2006a) theory that ownership pyramids arise because
they facilitate the creation of new firms when the pledgeability of cash flows to outside
financiers is limited. To this end, we study the organizational decisions of large organizations
(‘business groups’) as well as of the more prevalent smaller organizations, and compare the
characteristics of new firms set up pyramidally to those of new stand-alone firms. Our analyses
use a large sample of newly incorporated private firms in 19 European countries.
We find that the financing advantage of pyramids is pervasive in many countries, it exists
regardless of whether new firms are set up by business groups or by other organizations, and it
is used to fund new firms which, due to the nature of their projects, cannot raise enough
external financing. Our key results show that new firms set up in pyramids (i) require more
financing, (ii) are more difficult to finance externally because of lower pledgeable cash flows, and
(iii) receive more inside equity financing, especially when the parent company has more
resources. This evidence provides strong support for the theory’s key predictions. Alternative
explanations cannot conceptually account for all our results. In addition, we empirically rule out
the main alternative explanations of some of our results.
Our evidence suggests that pyramidal structures are used to set up new firms that cannot
raise external financing as stand-alone firms, i.e., that new firms ‘self-select’ into ownership
structures that alleviate their financing constraints stemming from the nature of their businesses.
This has implications for studies of how ownership by corporations (e.g., business groups)
affects a firm’s performance. Khanna (2000) highlights that unobserved factors might cause
both group affiliation and firm performance; in particular, profitability can affect a firm’s
decision to join a group (see Masulis, Pham, and Zein, 2011). Our results suggest that new firms
with low pledgeable income self-select into ownership structures with parent companies, causing
a downward bias in the estimated effect of having a parent company on performance.
32
More generally, taken together our results further suggest that pyramidal ownership
structures facilitate the financing of entrepreneurial activity. Interestingly, venture capital funding
is very limited in Europe compared to the U.S., Australia, or Israel (Hall and Lerner, 2010). In
Europe, corporate venturing could play a role in the financing of new firms similar to that of
venture capital in the U.S.
Last, researchers and policymakers worry that pyramidal business groups can exercise
market power or distort the allocation of resources, thus hindering innovation and economic
growth (e.g., Morck, Wolfenzon, and Yeung, 2005; Almeida and Wolfenzon, 2006b). Our results
suggest that regulation of business groups should not indiscriminately reduce the attractiveness
of pyramidal organizational structures. This could adversely affect the creation of new firms,
both inside large business groups as well as inside smaller organizations with no market power
or political clout, and thus could have unintended negative consequences for the economy.
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35
Table 1
Summary Statistics of the Size, Profitability, Inside Equity, and Technology of New Firms
The table reports summary statistics of the size, profitability, inside equity, and technology of new firms (firms with age
1-3 years since incorporation) in the European manufacturing sector in the period 2001-2006. Total Assets and Fixed
Assets are measured at book values in thousands of Euro. EBITDA/Total Assets is operating income before interest,
taxes, depreciation, and amortization scaled by total assets. EBIT/Total Assets is operating income before interest and
taxes scaled by total assets. Inside Equity is the equity supplied to the new firm by its controlling owner in thousands of
Euro. Fixed Assets/Employment and Wages/Employment are in thousands of Euro per employee. N is the number of firmyear observations for each variable.
Unit
Mean
S.D.
Pctile 10
Median
Pctile 90
N
20.4
3.4
217.2
55.0
3,145.0
1,169.5
82,926
75,363
-8.3
-17.9
10.6
4.9
32.3
26.6
39,356
45,372
0.0
0.0
3.0
1.1
144.4
19.8
82,261
82,377
2.3
13.0
15.6
31.3
99.4
55.3
34,087
28,737
Panel A: Size
Total Assets
Fixed Assets
EUR thousand
EUR thousand
1,934.2
828.4
7,163.2
3,486.0
Panel B: Profitability
EBITDA/Total Assets
EBIT/Total Assets
%
%
11.1
4.4
17.3
19.5
Panel C: Inside Equity
Inside Equity
Inside Equity/Total Assets
EUR thousand
%
126.8
6.8
728.0
13.8
Panel D: Technology
Fixed Assets/Employment
Wages/Employment
EUR thousand
EUR thousand
38.4
33.2
60.5
16.8
36
Table 2
Sample Composition by Ownership Structure
The table reports summary statistics of the ownership structure of new firms (firms with age 1-3 years
since incorporation) in the European manufacturing sector in the period 2001-2006. Panel A reports the
number of new firms in each year, as well as the fraction of new firms with parent companies (broken
down into those affiliated with groups and those not affiliated with groups) and stand-alone new firms.
Panel B reports the total assets these new firms add to the manufacturing sector in each year, as well as
the fraction of assets added by new firms with different ownership structures. New firms with parent
companies are new firms with at least one incorporated shareholder and stand-alone new firms are new
firms owned only by individuals. New firms with parent companies are further classified into those
whose parent companies are affiliated with a business group and those whose parent companies are not
affiliated with a business group as described in Section 3.4 of the text. In both panels, the numbers
reported separately for new firms whose parent companies are affiliated and not affiliated with groups (in
the last two columns) add up to those corresponding to all new firms with parent companies.
Year
All New Firms
Stand-Alone
With Parent Companies
All With Parent
Companies
Affiliated
with Groups
Not Affiliated
with Groups
Panel A: Number of New Firms
2001
2002
2003
2004
2005
2006
4,695
8,594
7,815
14,049
24,973
22,800
56.0%
53.4%
54.9%
72.0%
79.2%
77.1%
44.0%
46.6%
45.1%
28.0%
20.8%
22.9%
10.8%
7.3%
6.5%
3.4%
2.9%
2.9%
33.2%
39.3%
38.6%
24.6%
17.9%
20.0%
Total
82,926
71.1%
28.9%
4.2%
24.7%
Panel B: Total Assets of New Firms (EUR million)
2001
2002
2003
2004
2005
2006
21,589
28,501
22,633
22,477
32,986
32,210
10.9%
11.1%
14.4%
20.4%
23.5%
24.3%
89.1%
88.9%
85.6%
79.6%
76.5%
75.7%
36.2%
30.1%
27.2%
23.3%
29.4%
27.3%
53.0%
58.7%
58.4%
56.3%
47.1%
48.4%
Total
160,396
18.0%
82.0%
28.9%
53.1%
37
Table 3
Sample Composition by Country and Legal Form (2006)
The table reports summary statistics of new firms (firms with age 1-3 years since incorporation) in the European
manufacturing sector in 2006, broken down by the country of incorporation (Panel A) and the legal form of incorporation
(Panel B). The first two columns report the total assets added to the manufacturing sector by new firms and the number of
new firms, respectively. The remaining columns report the fraction of new firms with parent companies, the mean Total Assets,
the mean EBITDA/Total Assets, and the mean Inside Equity/Total Assets of new firms, respectively. New firms with parent
companies are new firms with at least one incorporated shareholder and stand-alone new firms are new firms owned only by
individuals. Public Limited companies are limited-liability companies which issue shares that can be listed (but none of the
new firms in our sample have listed shares yet). Private Limited companies are limited-liability companies whose shares cannot
be listed.
Total Assets
Number
(EUR million)
With Parent
Companies
Mean
Total Assets
(%)
(EUR thousand)
Mean
EBITDA/
Total Assets
(%)
Mean
Inside Equity/
Total Assets
(%)
Panel A: By Country
Austria
Bulgaria
Czech Republic
Denmark
Estonia
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Norway
Poland
Portugal
Russia
Spain
UK
2,551
110
13
1,863
103
934
6,948
829
67
335
4,619
28
165
2,245
487
435
225
3,464
6,787
771
49
35
1,186
66
1,096
2,616
344
14
535
339
10
82
1,432
93
181
16
1,122
12,813
32.9
22.4
8.6
64.2
37.9
40.2
28.7
9.0
14.3
8.2
97.3
40.0
36.6
51.4
37.6
26.5
25.0
38.6
10.0
3,308.9
2,252.6
357.3
1,571.2
1,553.7
852.6
2,656.1
2,411.3
4,763.4
626.1
13,625.9
2,801.6
2,012.5
1,568.0
5,234.7
2,404.5
14,074.3
3,087.5
529.7
9.6
17.8
26.7
12.5
18.5
12.0
14.2
9.4
12.2
10.4
3.0
9.4
10.1
5.0
5.7
11.1
15.4
6.7
7.1
8.1
11.0
14.0
9.4
12.8
15.7
7.6
8.1
13.8
9.6
2.1
Total
32,210
22,800
22.9
1,412.7
11.7
5.3
Panel B: By Legal Form
Public Limited
Private Limited
7,554
24,656
1,026
21,774
65.0
20.9
7,362.9
1,132.4
9.1
12.1
12.8
4.9
Total
32,210
22,800
22.9
1,412.7
11.7
5.3
38
Table 4
Size of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets) of new firms with
different ownership structures. The sample consists of new firms (firms with age 1-3) in the European manufacturing
sector in 2001-2006. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form
(Public Limited or Private Limited), age, and calendar year. Panel A compares new firms with parent companies to
matched stand-alone new firms; Panel B compares new firms whose parent companies are affiliated with groups to
matched stand-alone new firms; Panel C compares new firms whose parent companies are not affiliated with groups to
matched stand-alone new firms; Panel D compares new firms whose parent companies are affiliated with groups to
matched new firms whose parent companies are not affiliated with groups. New firms with parent companies are new
firms with at least one incorporated shareholder and stand-alone new firms are new firms owned only by individuals.
New firms with parent companies are further classified into those whose parent companies are affiliated with a business
group and those whose parent companies are not affiliated with a business group as described in Section 3.4 of the text.
Total Assets and Fixed Assets are measured in thousands of Euro. The last two columns report the number of new firms
on the common support.
Panel A: New Firms With Parent Companies vs. Stand-Alone New Firms
Total Assets
Fixed Assets
With Parent
Companies
4,114.6
1,837.0
Stand-Alone
Difference
t-stat
669.7
268.7
3,444.9
1,568.3
43.12
36.40
# With Parent
Companies
16,968
15,020
# Stand-Alone
58,984
53,675
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Total Assets
Fixed Assets
Affiliated
with Groups
11,720.9
5,307.5
Stand-Alone
Difference
t-stat
1,099.9
478.0
10,621.0
4,829.5
27.73
23.98
# Affiliated
with Groups
2,074
1,879
# Stand-Alone
58,912
53,607
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Total Assets
Fixed Assets
Not Affiliated
with Groups
3,077.6
1,348.8
Stand-Alone
Difference
t-stat
630.3
245.2
2,447.3
1,103.6
35.14
28.82
# Not Affiliated
with Groups
14,864
13,080
# Stand-Alone
58,984
53,675
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Total Assets
Fixed Assets
Affiliated
with Groups
11,505.7
5,272.9
Not Affiliated
with Groups
5,237.0
2,159.4
Difference
t-stat
6,268.7
3,113.5
16.39
14.92
39
# Affiliated
with Groups
2,458
2,235
# Not Affiliated
with Groups
20,419
18,401
Table 5
Profitability of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the profitability (EBITDA/Total Assets or EBIT/Total Assets)
of new firms with different ownership structures. The sample consists of new firms (firms with age 1-3) in the European
manufacturing sector in 2001-2006. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal
form (Public Limited or Private Limited), age, and calendar year. Panel A compares new firms with parent companies to
matched stand-alone new firms; Panel B compares new firms whose parent companies are affiliated with groups to matched
stand-alone new firms; Panel C compares new firms whose parent companies are not affiliated with groups to matched standalone new firms; Panel D compares new firms whose parent companies are affiliated with groups to matched new firms whose
parent companies are not affiliated with groups. New firms with parent companies are new firms with at least one
incorporated shareholder and stand-alone new firms are new firms owned only by individuals. New firms with parent
companies are further classified into those whose parent companies are affiliated with a business group and those whose
parent companies are not affiliated with a business group as described in Section 3.4 of the text. The last two columns report
the number of new firms on the common support.
Panel A: New Firms With Parent Companies vs. Stand-Alone New Firms
EBITDA/Total Assets
EBIT/Total Assets
With Parent
Companies
8.7%
1.8%
Stand-Alone
Difference
t-stat
13.1%
5.7%
-4.5%
-3.9%
-15.95
-13.13
# With Parent
Companies
10,326
12,318
# Stand-Alone
22,395
25,816
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
EBITDA/Total Assets
EBIT/Total Assets
Affiliated
with Groups
6.9%
0.7%
Stand-Alone
Difference
t-stat
12.8%
5.8%
-5.9%
-5.1%
-9.95
-8.30
# Affiliated
with Groups
1,530
1,818
# Stand-Alone
22,353
25,771
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Not Affiliated
with Groups
EBITDA/Total Assets
8.9%
EBIT/Total Assets
2.0%
Stand-Alone
Difference
t-stat
13.2%
5.7%
-4.2%
-3.7%
-14.52
-12.00
# Not Affiliated
with Groups
8,799
10,495
# Stand-Alone
22,395
25,816
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
EBITDA/Total Assets
EBIT/Total Assets
Affiliated
with Groups
6.6%
0.5%
Not Affiliated
Difference
with Groups
7.8%
-1.2%
1.3%
-0.8%
40
t-stat
-2.29
-1.44
# Affiliated
with Groups
1,924
2,280
# Not Affiliated
with Groups
13,867
16,014
Table 6
Inside Equity of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the Inside Equity (the equity supplied by the controlling owner
computed as described in Section 4.4 of the text) measured in thousands of Euro and the Inside Equity/Total Assets of new firms with
different ownership structures. The sample consists of new firms (firms with age 1-3) in the European manufacturing sector in
2001-2006. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private
Limited), age, and calendar year. Panel A compares new firms with parent companies to matched stand-alone new firms; Panel B
compares new firms whose parent companies are affiliated with groups to matched stand-alone new firms; Panel C compares new
firms whose parent companies are not affiliated with groups to matched stand-alone new firms; Panel D compares new firms whose
parent companies are affiliated with groups to matched new firms whose parent companies are not affiliated with groups. New firms
with parent companies are new firms with at least one incorporated shareholder and stand-alone new firms are new firms owned
only by individuals. New firms with parent companies are further classified into those whose parent companies are affiliated with a
business group and those whose parent companies are not affiliated with a business group as described in Section 3.4 of the text.
The last two columns report the number of new firms on the common support.
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Inside Equity
Inside Equity/Total Assets
With Parent
Companies
Stand-Alone
Difference
t-stat
327.6
34.9
292.7
10.8%
7.7%
3.1%
35.23
18.30
# With Parent
Companies
16,561
16,631
# Stand-Alone
58,818
58,514
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
with Groups
Inside Equity
Inside Equity/Total Assets
Stand-Alone
Difference
t-stat
22.63
13.65
974.4
57.3
917.1
14.3%
7.8%
6.5%
# Affiliated
with Groups
2,032
2,158
# Stand-Alone
58,745
58,441
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Inside Equity
Inside Equity/Total Assets
Not Affiliated
with Groups
Stand-Alone
Difference
t-stat
239.9
33.9
206.1
10.2%
7.7%
2.6%
28.10
14.99
# Not Affiliated
with Groups
14,505
14,383
# Stand-Alone
58,818
58,514
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Inside Equity
Inside Equity/Total Assets
Affiliated
with Groups
Not Affiliated
with Groups
Difference
t-stat
959.7
421.2
538.5
14.0%
11.1%
2.9%
13.06
5.76
41
# Affiliated
with Groups
2,401
2,606
# Not Affiliated
with Groups
19,971
20,016
Table 7
Inside Equity of New Firms Linked to Parent Companies with High and Low Retained Earnings
The table reports the results of matching-based comparisons of the Inside Equity (the equity supplied by the controlling
owner computed as described in Section 4.4 of the text) measured in thousands of Euro and the Inside Equity/Total Assets
of new firms whose parent companies have retained earnings (RE) above and below the sample median. The sample
consists of new firms (firms with age 1-3) with parent companies in the European manufacturing sector in 2001-2006.
Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private
Limited), age, and calendar year. New firms with parent companies are new firms with at least one incorporated
shareholder. The last two columns report the number of new firms with parent companies on the common support.
Inside Equity
Inside Equity/Total Assets
High RE
Low RE
Difference
t-stat
# High RE
# Low RE
516.2
227.5
288.7
12.2%
11.5%
0.6%
11.93
1.46
4,046
4,023
7,953
8,066
42
Table 8
Technology of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the capital intensity and average wage paid of new firms with
different ownership structures. The sample consists of new firms (firms with age 1-3) in the European manufacturing sector in
2001-2006. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or
Private Limited), age, and calendar year. Panel A compares new firms with parent companies to matched stand-alone new firms;
Panel B compares new firms whose parent companies are affiliated with groups to matched stand-alone new firms; Panel C
compares new firms whose parent companies are not affiliated with groups to matched stand-alone new firms; Panel D compares
new firms whose parent companies are affiliated with groups to matched new firms whose parent companies are not affiliated with
groups. New firms with parent companies are new firms with at least one incorporated shareholder and stand-alone new firms are
new firms owned only by individuals. New firms with parent companies are further classified into those whose parent companies
are affiliated with a business group and those whose parent companies are not affiliated with a business group as described in
Section 3.4 of the text. Fixed Assets/Employment and Wages/Employment are measured in thousands of Euro per employee. The last
two columns report the number of new firms on the common support.
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Fixed Assets/Employment
Wage/Employment
With Parent
Companies
45.0
37.2
Stand-Alone
Difference
t-stat
29. 8
31.5
15.2
5.7
16.23
18.73
# With Parent
Companies
8,897
8,009
# Stand-Alone
18,976
14,468
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Fixed Assets/Employment
Wage/Employment
Affiliated
with Groups
67.2
40.8
Stand-Alone
Difference
t-stat
33.3
28.2
33.9
12.5
12.84
18.65
# Affiliated
with Groups
1,263
1,186
# Stand-Alone
18,906
14,447
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Fixed Assets/Employment
Wage/Employment
Not Affiliated
with Groups
41.3
36.6
Stand-Alone
Difference
t-stat
29.2
32.1
12.1
4.5
12.73
14.43
# Not Affiliated
with Groups
7,615
6,817
# Stand-Alone
18,976
14,468
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Fixed Assets/Employment
Wage/Employment
Affiliated
with Groups
65.7
41.9
Not Affiliated
with Groups
52.5
36.8
43
Difference
t-stat
13.2
5.1
4.87
8.76
# Affiliated
with Groups
1,612
1,625
# Not Affiliated
with Groups
12,390
11,566
Table 9
Profitability of New Firms with Parent Companies and Diversion Incentives
The table reports the results of OLS regressions of the profitability (EBITDA/Total Assets) of new firms with parent
companies on the difference between their controlling owners’ control and cash flow rights (Wedge) and control variables.
Log(Total Assets) is the logarithm of total assets. Age is the number of years since a firm’s incorporation. Tangibility is fixed
assets scaled by total assets. Leverage is short-term debt plus long-term debt scaled by total assets. All specifications use
samples of new firms with parent companies in the European manufacturing sector in 2001-2006. In columns (1)-(3), we use
new firms with parent companies (i.e., those with age 1-3) and include fixed effects for each country-industry-legal formcalendar year cell. The fixed effects are based on the three-digit ISIC industry definitions and the legal form of incorporation
is either Private Limited or Public Limited. In columns (4)-(6), we use a panel created by following new firms with parent
companies until the last year we observe them in the data, and include firm fixed effects and year fixed effects. Robust
standard errors (clustered at the firm level) are reported in parentheses. *, **, and *** denote significance at the 10%, 5%, and
1% levels, respectively.
Wedge
(1)
-0.035
(0.043)
(2)
-0.031
(0.043)
1.152***
(0.301)
0.016***
(0.004)
(3)
0.023
(0.049)
0.451
(0.402)
0.014**
(0.005)
-0.040**
(0.020)
-0.149***
(0.018)
(4)
0.138
(0.104)
(5)
0.130
(0.104)
2.670**
(1.178)
0.000
(0.002)
(6)
0.132
(0.095)
2.870**
(1.304)
-0.004**
(0.002)
-0.119***
(0.029)
-0.139***
(0.020)
Yes
No
Yes
No
Yes
No
No
Yes
No
Yes
No
Yes
8,924
0.00
8,924
0.01
4,461
0.09
14,892
0.57
14,892
0.57
7,882
0.61
Log(Total Assets) / 1,000
Age
Tangibility
Leverage
Country-Industry-Legal Form-Year FE
Firm FE and Year FE
Observations
Adjusted R2
44
Table 10
Sensitivity to Profit Shocks: Firms with Parent Companies vs. Stand-Alone Firms
The table reports the results of OLS regressions of earnings before interest, taxes, depreciation, and
amortization (EBITDA) on the EBITDA predicted in the absence of diversion (PEBITDA), the
interaction of PEBITDA with an indicator variable for whether the firm has a parent company or is a
stand-alone one (PC), and control variables. All regressions include firm fixed effects and year fixed effects.
PEBITDA is calculated, for each firm, as the asset-weighted average of the EBITDA/Total Assets for all
firms in the same country-industry-calendar year cell (other than itself) multiplied by the firm's total assets.
Log(Total Assets) is the logarithm of total assets. Age is the number of years since a firm’s incorporation. All
specifications use samples of firms with parent companies and stand-alone ones in the European
manufacturing sector in 2001-2006. The panel used in columns (1) and (2) contains all new firms (i.e., those
with age 1-3) until the last year we observe them in the data. The panel used in columns (3) and (4)
contains all non-new firms (defined as the complement of the sample of new firms in the Amadeus
database). Robust standard errors (clustered at the firm level) are reported in parentheses. *, **, and ***
denote significance at the 10%, 5%, and 1% levels, respectively.
PEBIDTA
PEBIDTA × PC
PEBIDTA × Log(Total Assets)
Log(Total Assets)
PEBIDTA × Age
Age
Firm FE and Year FE
Observations
Adjusted R2
New Firms with
Parent Companies vs.
Stand-Alone New Firms
(1)
(2)
0.538***
-0.653***
(0.102)
(0.199)
-0.054
0.112
(0.115)
(0.120)
0.233***
(0.069)
0.367***
(0.035)
0.035***
(0.014)
-0.004**
(0.002)
Non-New Firms
with Parent Companies vs.
Stand-Alone Non-New Firms
(3)
(4)
0.778***
-0.175
(0.069)
(0.126)
-0.207***
-0.176**
(0.073)
(0.075)
0.179***
(0.027)
0.628***
(0.037)
-0.000
(0.001)
-0.011***
(0.002)
Yes
Yes
Yes
Yes
49,509
0.81
49,509
0.82
424,395
0.87
424,395
0.87
45
Table 11
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms whose Shareholders Own Other
Firms
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets), profitability
(EBITDA/Total Assets or EBIT/Total Assets), inside equity (Inside Equity or Inside Equity/Total Assets), and technology (Fixed
Assets/Employment and Wages/Employment) of new firms with different ownership structures. The sample consists of new firms
(firms with age 1-3) in the European manufacturing sector in 2001-2006. Matching is exact on country of incorporation, threedigit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. New firms with parent
companies are new firms with at least one incorporated shareholder. Stand-alone new firms are new firms owned only by
individuals and for which at least one of its shareholders owns another firm at the time the new firm is incorporated. Total
Assets, Fixed Assets, and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wages/Employment are
measured in thousands of Euro per employee. The last two columns report the number of new firms on the common support.
With Parent
Companies
Stand-Alone
(Shareholders Difference
Own Other)
t-stat
# With Parent
Companies
# Stand-Alone
(Shareholders
Own Other)
35.23
29.12
13,467
11,606
24,962
22,343
-10.51
-9.26
7,300
8,976
7,185
8,481
28.60
15.31
13,150
13,090
24,779
24,652
9.62
11.56
6,262
5,438
6,335
3,973
Panel A: Size
Total Assets
Fixed Assets
3,814.2
1,677.4
718.5
294.2
3,095.7
1,383.2
Panel B: Profitability
EBITDA/Total Assets
EBIT/Total Assets
9.0%
2.0%
13.5%
6.3%
-4.5%
-4.2%
Panel C: Inside Equity
Inside Equity
Inside Equity/Total Assets
288.0
10.2%
36.7
6.9%
251.3
3.3%
Panel D: Technology
Fixed Assets/Employment
Wages/Employment
42.4
38.2
29.9
32.9
12.6
5.3
46
Table 12
Characteristics of Startups with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets), profitability (EBITDA/Total Assets
or EBIT/Total Assets), inside equity (Inside Equity or Inside Equity/Total Assets), and technology (Fixed Assets/Employment and
Wages/Employment) of startups with parent companies and stand-alone new firms. The sample consists of new firms (firms with age 1-3) in
the European manufacturing sector in 2001-2006. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal
form (Public Limited or Private Limited), age, and calendar year. A new firm with a parent company (i.e., with at least one incorporated
shareholder) is a startup if none of the corporations to which the new firm is linked directly or indirectly through ownership engaged in
any acquisition in the 2000-2007 period, as reported in the Zephyr dataset. Stand-alone new firms are new firms owned only by
individuals. Total Assets, Fixed Assets, and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wages/Employment
are measured in thousands of Euro per employee. The last two columns report the number of new firms on the common support.
With Parent
Companies
(Startups)
Stand-Alone
Difference
t-stat
# With Parent
Companies
(Startups)
# Stand-Alone
30.27
24.96
13,250
11,636
58,762
53,463
-12.84
-10.72
7,790
9,280
22,245
25,653
24.97
13.46
12,919
12,848
58,602
58,300
11.10
11.97
6,764
6,098
18,848
14,359
Panel A: Size
Total Assets
Fixed Assets
2,673.8
1,133.3
583.9
231.7
2,089.8
901.7
Panel B: Profitability
EBITDA/Total Assets
EBIT/Total Assets
9.4%
2.5%
13.3%
5.9%
-3.9%
-3.4%
Panel C: Inside Equity
Inside Equity
Inside Equity/Total Assets
196.8
10.1%
30.4
7.7%
166.4
2.4%
Panel D: Technology
Fixed Assets/Employment
Wages/Employment
39.5
35.9
28.8
32.1
10.7
3.8
47
Table 13
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms: No Potential for Cooperation in
Product Markets
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets), profitability
(EBITDA/Total Assets or EBIT/Total Assets), inside equity (Inside Equity or Inside Equity/Total Assets), and technology (Fixed
Assets/Employment and Wages/Employment) of new firms which have no potential to cooperate in product markets with their
ultimate corporate shareholders and stand-alone new firms. The sample consists of new firms (firms with age 1-3) in the
European manufacturing sector in 2001-2006, excluding those new firms with parent companies which have the potential to
establish cooperation in product markets with their ultimate corporate shareholders. The new firms with parent companies
excluded from the sample have either potential for 'horizontal' or 'vertical' cooperation with their ultimate corporate
shareholder (or both). There is potential for horizontal cooperation if both the new firm and the ultimate corporate
shareholder operate in the same four-digit ISIC industry. There is potential for vertical cooperation if the new firm and the
ultimate corporate shareholder operate in industries related by supply chains, either as suppliers or customers, identified using
the Input-Output matrix for the UK as described in Section 5.4 of the text. Matching is exact on country of incorporation,
three-digit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. New firms with
parent companies are new firms with at least one incorporated shareholder. The ultimate corporate shareholder is the
corporation at the top of the ownership pyramid. Stand-alone new firms are new firms owned only by individuals. Total Assets,
Fixed Assets, and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wages/Employment are measured
in thousands of Euro per employee. The last two columns report the number of new firms on the common support.
With Parent
Companies
Stand-Alone
Difference
t-stat
# With Parent
Companies
# Stand-Alone
26.94
22.56
8,084
7,132
58,504
53,217
-11.38
-9.61
5,167
6,089
22,069
25,438
23.97
13.10
7,868
7,848
58,346
58,056
9.94
12.18
4,335
4,021
18,662
14,246
Panel A: Size
Total Assets
Fixed Assets
3,256.9
1,478.6
641.5
253.0
2,615.4
1,225.7
Panel B: Profitability
EBITDA/Total Assets
EBIT/Total Assets
9.2%
2.3%
13.4%
6.0%
-4.2%
-3.8%
Panel C: Inside Equity
Inside Equity
Inside Equity/Total Assets
291.0
11.1%
34.6
8.1%
256.4
3.0%
Panel D: Technology
Fixed Assets/Employment
Wages/Employment
42.7
35.9
28.4
29.9
14.3
6.0
48
Table 14
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms with 90% Ownership
Disclosure
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets), profitability
(EBITDA/Total Assets or EBIT/Total Assets), inside equity (Inside Equity or Inside Equity/Total Assets), and technology (Fixed
Assets/Employment and Wages/Employment) of new firms with different ownership structures. The sample consists of new firms
(firms with age 1-3) in the European manufacturing sector in 2001-2006. Matching is exact on country of incorporation, threedigit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. New firms with parent
companies are new firms with at least one incorporated shareholder. Stand-alone new firms are new firms owned only by
individuals and for which disclosed ownership stakes account for at least 90% of their equity (new stand-alone firms for which
disclosed ownership stakes account for less than 90% of their equity are discarded from the sample). Total Assets, Fixed Assets,
and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wages/Employment are measured in thousands
of Euro per employee. The last two columns report the number of new firms on the common support.
Stand-Alone
With Parent
(90% of Stakes
Companies
Disclosed)
Difference
t-stat
# With Parent
Companies
# Stand-Alone
(90% of Stakes
Disclosed)
41.59
35.28
15,893
13,965
54,194
49,094
-15.30
-12.81
9,387
11,250
18,383
21,405
33.51
13.12
15,485
15,471
54,050
53,762
15.90
16.57
8,132
7,230
15,820
11,528
Panel A: Size
Total Assets
Fixed Assets
4,278.5
1,927.1
651.4
253.8
3,627.2
1,673.2
Panel B: Profitability
EBITDA/Total Assets
EBIT/Total Assets
8.6%
1.8%
13.5%
6.0%
-4.8%
-4.3%
Panel C: Inside Equity
Inside Equity
Inside Equity/Total Assets
346.6
10.7%
35.6
8.3%
311.0
2.4%
Panel D: Technology
Fixed Assets/Employment
Wages/Employment
45.8
37.0
29.4
31.4
16.4
5.6
49
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1
2
3
4
5
6
7
8
9
10
Stand-Alone
11
12
13
14
15
16
17
18
19 20
Parent Companies
Figure 1. Age Profiles of Profitability
The sample consists of all firms in the European manufacturing sector (regardless of age) in 2001-2006. The
figure plots the age profiles of profitability (EBITDA/Total Assets) estimated using the regression in equation
(1), i.e., the estimates of α+βa for firms with parent companies and of θa for stand-alone ones (vertical axis) for
each age category a (horizontal axis). The age profiles of profitability are in excess of the profitability of
stand-alone firms older than 20 years in the same country-industry-legal form-calendar year cell.
50
APPENDIX to “Pyramidal Ownership and the Creation of New Firms”
This Appendix reports additional results that we discuss but do not tabulate in the main text of the
paper. The content is summarized below, and the tables and figures follow afterwards.
Table A1: Sample Composition by Industry (2006)
Table A2: Age Profiles of Profitability for All Firms
Table A3: Age Profiles of Profitability for New Firms
Table A4: Size and Profitability of New Firms Linked to Parent Companies with High and Low
Retained Earnings
Table A5: Profitability of New Firms with Parent Companies and Diversion Incentives: Wedge Ratio
Table A6: Characteristics of New Firms with Parent Companies and Stand-Alone New Firms with
100% Ownership Disclosure
Table A7: Characteristics of New Firms with Parent Companies and Stand-Alone New Firms: UK
and Non-UK Firms
Table A8: Characteristics of New Firms with Parent Companies Not Suspect of Being Shells and
Stand-Alone New Firms
Table A9: Size and Profitability of New Firms with Parent Companies and Stand-Alone New Firms:
Propensity Score Matching
Table A10: Size and Profitability of New Firms with Parent Companies and Stand-Alone New Firms:
Not Matched on Legal Form
Table A11: Size and Profitability of New Firms with Parent Companies and Stand-Alone New Firms:
Sub-Sample of New Firms Incorporated as Private Limited
Table A12: Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Robustness to Using Only One Observation Per Firm
Table A13: Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Robustness to Defining New Firms as Those Age 1, Age 2, or Age 3
Figure A1: Age Profiles of Profitability. Figure A1.a: Firms with Parent Companies Affiliated with
Groups vs. Stand-Alone Firm. Figure A1.b: Firms with Parent Companies Not Affiliated with
Groups vs. Stand-Alone Firms.
Figure A2: Age Profiles of Profitability in Industries with High and Low Enterprise Death Rates.
Figure A2.a: Enterprise Death Rates Above Median. Figure A2.b: Enterprise Death Rates Below
Median.
Table A1
Sample Composition by Industry (2006)
The table reports summary statistics of the sample of new firms (firms with age 1-3 years since incorporation) in the European manufacturing sector in 2006 broken
down by two-digit ISIC industry. The first two columns report the total assets added to the manufacturing sector by new firms (in millions of Euro) and the number
of new firms, respectively. The remaining columns report the fraction of new firms with parent companies, the mean Total Assets , the mean EBITDA/Total Asset ,
and the mean Inside Equity/Total Assets of new firms, respectively. New firms with parent companies are new firms with at least one incorporated shareholder and
stand-alone new firms are new firms owned only by individuals.
Total Assets
Food products and beverages
Textiles
Apparel
Leather
Wood and cork
Pulp and paper
Printing and publishing
Coke and refined petroleum
Chemicals
Rubber and plastics
Other non-metallic mineral products
Basic metals
Fabricated metal products
Machinery and equipment
Electrical machinery
Radio, television and communication equipment
Medical, precision and optical instruments
Motor vehicles
Other transportation equipment
Manufacturing N.E.C.
Total
Number
With Parent
Companies
Mean
Total Assets
Mean
EBITDA/
Total Assets
Mean
Inside Equity/
Total Assets
(EUR thousand)
2,051.7
1,185.7
753.2
1,090.3
708.9
2,634.2
588.8
9,043.2
4,866.0
1,764.0
1,659.1
2,849.9
971.4
2,242.3
1,931.3
2,868.8
1,003.6
3,331.9
1,808.6
678.4
(%)
8.6
9.7
7.3
12.0
11.6
8.9
10.9
5.0
6.8
12.2
11.4
12.7
15.5
13.1
13.4
10.4
11.3
9.3
10.3
10.1
(%)
7.8
5.6
5.0
5.5
4.0
6.9
4.6
10.1
9.2
6.4
6.4
4.3
4.0
6.1
5.8
7.5
8.2
4.7
5.0
4.1
1,412.7
11.7
5.3
(EUR million)
3,545
748
389
158
990
672
2,037
280
2,920
1,438
1,657
1,285
4,364
4,545
1,464
984
744
1,299
1,025
1,665
1,728
631
517
145
1,396
255
3,459
31
600
815
999
451
4,492
2,027
758
343
741
390
567
2,455
(%)
29.7
22.8
14.9
17.2
15.2
26.3
17.5
45.2
46.0
32.4
25.7
23.5
18.0
31.6
31.7
37.3
32.0
26.9
25.0
14.8
32,210
22,800
22.9
Table A2
Age Profiles of Profitability for All Firms
The table reports the results of OLS regressions which estimate the age profiles of profitability (EBITDA/Total Assets ) for firms with parent
companies and stand-alone ones. The sample includes all firms with parent companies and stand-alone firms in the European manufacturing
sector in 2001-2006 regardless of age. We use the following regression specification (equation (1) in the paper):
EBITDA / Total Assetsij      PCij    a  PCij  Ageija   a  1  PCij   Ageija   j   ij ,
20
20
a 1
a 1
where i and j denote firm and country-industry-legal form-calendar year cell, respectively (industries are defined at the three-digit ISIC level).
PC ij equals one if a firm has a parent company and zero otherwise; Age a ij equals one if a firm is a years old and zero otherwise, with a =
1,…,20 ; and  j is a fixed effect for each country-industry-legal form-calendar year cell. In column (1) we use all firms with parent companies
and stand-alone ones (PC = 1 for firms with parent companies and = 0 for stand-alone ones); in column (2) we use all firms with parent
companies affiliated with business groups and stand-alone ones (Affiliated PC = 1 for firms whose parent companies are affiliated with business
groups and = 0 for stand-alone ones); and in column (3) we use all firms with parent companies not affiliated with business groups and standalone ones (Not Affiliated PC = 1 for firms whose parent companies are not affiliated with business groups and = 0 for stand-alone ones). Firms
with parent companies are firms with at least one incorporated shareholder and stand-alone firms are firms owned only by individuals. Firms
with parent companies are further classified into those whose parent companies are affiliated with a business group and those whose parent
companies are not affiliated with a business group as described in Section 3.4 of the text. For ease of presentation, PC Type in the table is PC
for column (1), Affiliated PC for column (2), and Not Affiliated PC for column (3). Robust standard errors (clustered at the firm level) are
reported in parentheses. *, **, and *** denote significance at the 10%, 5%, and 1% levels, respectively.
Table A2 (Cont.)
PC
(1)
-0.004***
(0.001)
Affiliated PC
(2)
-0.003**
(0.001)
Not Affiliated PC
Age 1 × PC Type
Age 2 × PC Type
Age 3 × PC Type
Age 4 × PC Type
Age 5 × PC Type
Age 6 × PC Type
Age 7 × PC Type
Age 8 × PC Type
Age 9 × PC Type
Age 10 × PC Type
Age 11 × PC Type
Age 12 × PC Type
Age 13 × PC Type
Age 14 × PC Type
Age 15 × PC Type
Age 16 × PC Type
Age 17 × PC Type
Age 18 × PC Type
Age 19 × PC Type
Age 20 × PC Type
(3)
-0.005***
(0.001)
-0.029***
(0.003)
-0.017***
(0.002)
-0.011***
(0.002)
-0.004***
(0.002)
0.003*
(0.002)
0.006***
(0.002)
0.005***
(0.002)
0.006***
(0.002)
0.005***
(0.002)
0.007***
(0.002)
0.006***
(0.002)
0.006***
(0.001)
0.008***
(0.001)
0.007***
(0.001)
0.006***
(0.001)
0.006***
(0.001)
0.007***
(0.002)
0.007***
(0.002)
0.006***
(0.002)
0.004**
(0.002)
-0.034***
(0.007)
-0.030***
(0.004)
-0.023***
(0.004)
-0.013***
(0.003)
-0.005
(0.003)
-0.004
(0.003)
-0.002
(0.003)
0.001
(0.003)
-0.002
(0.003)
-0.002
(0.003)
-0.005
(0.003)
0.004
(0.003)
0.003
(0.003)
0.004
(0.003)
0.004
(0.003)
0.006**
(0.003)
0.007**
(0.003)
0.001
(0.004)
0.002
(0.004)
0.007*
(0.004)
-0.027***
(0.003)
-0.013***
(0.002)
-0.007***
(0.002)
-0.001
(0.002)
0.006***
(0.002)
0.009***
(0.002)
0.008***
(0.002)
0.009***
(0.002)
0.007***
(0.002)
0.010***
(0.002)
0.010***
(0.002)
0.007***
(0.002)
0.010***
(0.002)
0.009***
(0.002)
0.007***
(0.002)
0.007***
(0.002)
0.008***
(0.002)
0.010***
(0.002)
0.008***
(0.002)
0.004*
(0.002)
Table A2 (Cont.)
Age 1 × (1-PC Type)
Age 2 × (1-PC Type)
Age 3 × (1-PC Type)
Age 4 × (1-PC Type)
Age 5 × (1-PC Type)
Age 6 × (1-PC Type)
Age 7 × (1-PC Type)
Age 8 × (1-PC Type)
Age 9 × (1-PC Type)
Age 10 × (1-PC Type)
Age 11 × (1-PC Type)
Age 12 × (1-PC Type)
Age 13 × (1-PC Type)
Age 14 × (1-PC Type)
Age 15 × (1-PC Type)
Age 16 × (1-PC Type)
Age 17 × (1-PC Type)
Age 18 × (1-PC Type)
Age 19 × (1-PC Type)
Age 20 × (1-PC Type)
Country-Industry-Legal Form-Year FE
Observations
2
Adjusted R
(1)
0.013***
(0.003)
0.030***
(0.002)
0.029***
(0.002)
0.027***
(0.001)
0.027***
(0.001)
0.025***
(0.001)
0.023***
(0.001)
0.023***
(0.001)
0.022***
(0.001)
0.018***
(0.001)
0.020***
(0.001)
0.018***
(0.001)
0.016***
(0.001)
0.015***
(0.001)
0.016***
(0.001)
0.012***
(0.001)
0.011***
(0.001)
0.009***
(0.001)
0.008***
(0.001)
0.007***
(0.001)
(2)
0.014***
(0.003)
0.031***
(0.002)
0.030***
(0.002)
0.028***
(0.001)
0.027***
(0.001)
0.026***
(0.001)
0.023***
(0.001)
0.023***
(0.001)
0.022***
(0.001)
0.019***
(0.001)
0.020***
(0.001)
0.018***
(0.001)
0.016***
(0.001)
0.015***
(0.001)
0.015***
(0.001)
0.012***
(0.001)
0.012***
(0.001)
0.009***
(0.001)
0.008***
(0.001)
0.008***
(0.001)
(3)
0.014***
(0.003)
0.030***
(0.002)
0.029***
(0.002)
0.028***
(0.001)
0.027***
(0.001)
0.026***
(0.001)
0.023***
(0.001)
0.023***
(0.001)
0.022***
(0.001)
0.019***
(0.001)
0.020***
(0.001)
0.019***
(0.001)
0.016***
(0.001)
0.015***
(0.001)
0.016***
(0.001)
0.012***
(0.001)
0.011***
(0.001)
0.009***
(0.001)
0.008***
(0.001)
0.008***
(0.001)
Yes
Yes
Yes
537,532
0.05
349,511
0.06
475,783
0.05
Table A3
Age Profiles of Profitability for New Firms
The table reports the results of OLS regressions which estimate the age profiles of profitability (EBITDA/Total Assets ) for new firms with
parent companies and stand-alone ones. The table is analogous to Table A2, except that the sample includes only new firms until the year we
last observe them in the sample (but does not include the older firms) and hence the profiles are only estimated for the age categories a =
1,…,5 years old.
PC
(1)
-0.020***
(0.004)
Affiliated PC
(2)
-0.040***
(0.007)
Not Affiliated PC
Age 1 × PC Type
Age 2 × PC Type
Age 3 × PC Type
Age 4 × PC Type
Age 5 × PC Type
Age 1 × (1-PC Type)
Age 2 × (1-PC Type)
Age 3 × (1-PC Type)
Age 4 × (1-PC Type)
Age 5 × (1-PC Type)
Country-Industry-Legal Form-Year FE
Firm FE and Year FE
Observations
Adjusted R2
(3)
-0.017***
(0.004)
-0.035***
(0.005)
-0.023***
(0.004)
-0.016***
(0.003)
-0.006*
(0.003)
-0.000
(0.003)
-0.021*
(0.011)
-0.017**
(0.008)
-0.010
(0.007)
0.005
(0.007)
0.001
(0.007)
-0.037***
(0.005)
-0.024***
(0.004)
-0.017***
(0.004)
-0.008**
(0.004)
-0.000
(0.004)
-0.011***
(0.004)
0.003
(0.003)
0.004
(0.003)
0.004
(0.003)
0.004
(0.003)
-0.014***
(0.004)
-0.001
(0.003)
0.000
(0.003)
0.002
(0.003)
0.002
(0.003)
-0.011***
(0.004)
0.003
(0.003)
0.004
(0.003)
0.004
(0.003)
0.004
(0.003)
Yes
Yes
Yes
65,471
41,681
59,510
0.05
0.06
0.05
Table A4
Size and Profitability of New Firms Linked to Parent Companies
with High and Low Retained Earnings
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ) and profitability (EBITDA/Total Assets
or EBIT/Total Assets ) of new firms whose parent companies have retained earnings (RE ) above and below the sample median. The sample
consists of new firms (firms with age 1-3) with parent companies in the European manufacturing sector in 2001-2006. Matching is exact on
country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. New
firms with parent companies are new firms with at least one incorporated shareholder. Total Assets and Fixed Assets are measured in
thousands of Euro. The last two columns report the number of new firms with parent companies on the common support.
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
High RE
Low RE
Difference
t-stat
# High RE
# Low RE
5,678.9
2,600.4
Panel A: Size
2,599.7
3,079.2
1,207.7
1,392.7
13.98
11.45
4,166
3,605
8,115
7,354
7.9%
1.7%
Panel B: Profitability
8.5%
-0.6%
2.1%
-0.4%
-1.03
-0.66
2,667
3,239
6,005
6,891
Table A5
Profitability of New Firms with Parent Companies and Diversion Incentives: Wedge Ratio
The table reports the results of OLS regressions of profitability (EBITDA/Total Assets ) on the ratio of controlling owners’ control to cash flow
rights (WedgeR ) and control variables. The table is analogous to Table 9, except that we measure diversion incentives using the ratio of controlling
owners’ control to cash flow rights instead of the difference.
WedgeR
(1)
-0.143
(0.109)
Log(Total Assets) / 1,000
Age
(2)
-0.174
(0.109)
(3)
0.020
(0.125)
1.192***
(0.302)
0.016***
(0.004)
0.435
(0.402)
0.014**
(0.005)
-0.040**
(0.020)
-0.149***
(0.018)
Tangibility
Leverage
Country-Industry-Legal Form-Year FE
Firm FE and Year FE
Observations
Adjusted R2
(4)
0.019
(0.171)
(5)
0.032
(0.170)
(6)
0.165
(0.112)
2.702**
(1.179)
0.000
(0.002)
2.907**
(1.304)
-0.004**
(0.002)
-0.119***
(0.029)
-0.139***
(0.020)
Yes
No
Yes
No
Yes
No
No
Yes
No
Yes
No
Yes
8,924
8,924
4,461
14,892
14,892
7,882
0.00
0.01
0.09
0.57
0.57
0.61
Table A6
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms
with 100% Ownership Disclosure
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets or
EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment and Wages/Employment )
of new firms with different ownership structures. The table is analogous to Table 14, except that stand-alone new firms are new firms owned
only by individuals and for which disclosed ownership stakes by individuals account for at least 100% of their equity (new stand-alone firms
for which disclosed ownership stakes account for less than 100% of their equity are discarded from the sample). Total Assets , Fixed Assets ,
and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wages/Employment are measured in thousands of Euro per
employee.
With Parent
Companies
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
Stand-Alone
(100% of Stakes Difference
Disclosed)
t-stat
# With Parent
Companies
# Stand-Alone
(100% of Stakes
Disclosed)
4,655.7
2,110.9
Panel A: Size
637.6
4,018.1
257.0
1,853.9
38.25
32.40
15,409
13,566
37,668
34,725
8.7%
1.8%
Panel B: Profitability
13.6%
-4.9%
6.2%
-4.4%
-15.23
-13.04
8,926
10,723
15,382
17,730
386.6
10.7%
Panel C: Inside Equity
36.2
350.5
8.7%
2.0%
31.47
10.73
15,104
15,014
37,509
37,258
46.3
37.1
Panel D: Technology
29.4
16.9
31.5
5.6
15.55
15.86
7,722
6,833
14,134
10,202
Table A7
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
UK and Non-UK Firms
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets
or EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment and
Wages/Employment ) of new firms with parent companies and stand-alone new firms in subsamples of UK and non-UK new firms. The
sample consists of new firms (firms with age 1-3) in the European manufacturing sector in 2001-2006. Matching is exact on country of
incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. Panel A reports
the results using the subsample of new firms incorporated in the UK; Panel B reports the results using the subsample of new firms
incorporated in all other countries. New firms with parent companies are new firms with at least one incorporated shareholder and standalone new firms are new firms owned only by individuals. Total Assets , Fixed Assets , and Inside Equity are measured in thousands of Euro.
Fixed Assets/Employment and Wage/Employment are measured in thousands of Euro per employee. The last two columns report the
number of new firms on the common support.
With Parent
Companies
Stand-Alone
Difference
t-stat
# With Parent
Companies
Panel A: UK New Firms with Parent Companies vs. UK Stand-Alone New Firms
4,078.9
316.7
3,762.2
23.19
4,502
1,888.2
137.6
1,750.6
18.88
3,504
Total Assets
Fixed Assets
# Stand-Alone
31,702
27,828
EBITDA/Total Assets
EBIT/Total Assets
4.7%
-2.4%
14.5%
3.9%
-9.9%
-6.3%
-8.46
-5.25
1,075
1,498
3,146
4,181
Inside Equity
Inside Equity/Total Assets
225.1
6.8%
6.6
2.2%
218.6
4.6%
15.39
16.08
4,504
4,540
32,324
32,255
Fixed Assets/Employment
Wages/Employment
50.3
39.7
19.9
23.2
30.5
16.5
7.61
11.15
493
490
417
352
Total Assets
Fixed Assets
Panel B: Non-UK New Firms with Parent Companies vs. Non-UK Stand-Alone New Firms
4,153.1
817.1
3,336.0
35.95
12,626
1,827.0
316.3
1,510.7
30.79
11,588
EBITDA/Total Assets
EBIT/Total Assets
27,275
25,834
9.1%
2.4%
13.0%
6.0%
-3.9%
-3.6%
-14.04
-12.42
9,262
10,841
19,187
21,578
Inside Equity
Inside Equity/Total Assets
366.1
12.2%
45.7
9.7%
320.4
2.6%
31.56
11.89
12,192
12,175
26,487
26,252
Fixed Assets/Employment
Wages/Employment
44.7
37.1
30.4
32.0
14.3
5.0
15.09
16.35
8,422
7,523
18,555
14,114
Table A8
Characteristics of New Firms with Parent Companies Not Suspect of Being Shells
and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets
or EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment and
Wages/Employment ) of new firms with at least one parent company which is not suspect of being a shell and stand-alone new firms. The
sample consists of new firms (firms with age 1-3) in the European manufacturing sector in 2001-2006. Matching is exact on country of
incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. A parent
company is suspect of being a shell if it satisfies two conditions: (i) the only reported shareholder is a single individual who owns at least
90% of the shares and (ii) its cash-to-total assets ratio is greater than 50% and either its total assets are less than €20,000 or its annual sales
are less than €10,000. Stand-alone new firms are new firms owned only by individuals. Total Assets , Fixed Assets , and Inside Equity are
measured in thousands of Euro. Fixed Assets/Employment and Wage/Employment are measured in thousands of Euro per employee. The
last two columns report the number of new firms on the common support.
With Parent
Companies
(Not Shells)
t-stat
# With Parent
Companies
(Not Shells)
# Stand-Alone
4,260.4
1,889.3
Panel A: Size
690.5
3,569.9
281.6
1,607.8
37.58
31.90
12,399
10,970
58,984
53,675
8.5%
1.8%
Panel B Profitability
13.3%
-4.8%
6.0%
-4.2%
-15.59
-12.94
7,895
9,381
22,395
25,816
Inside Equity
Inside Equity/Total Assets
351.6
11.5%
Panel C: Inside Equity
37.1
314.5
8.1%
3.3%
31.66
16.95
12,058
12,101
58,818
58,514
Fixed Assets/Employment
Wages/Employment
45.8
37.8
Panel D: Technology
29.9
15.9
31.9
5.9
15.17
17.85
6,758
6,162
18,974
14,468
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Stand-Alone
Difference
Table A9
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Propensity Score Matching
The table reports the results of propensity-score matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability
(EBITDA/Total Assets or EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed
Assets/Employment or Wages/Employment ) of new firms with different ownership structures. Matching is based on propensity scores
estimated using a Logit model of the probability that a new firm is incorporated with a parent company using the country, three-digit ISIC
industry, age since incorporation, legal form (Public Limited or Private Limited), and calendar year dummies as predictors. New firms with
parent companies are new firms with at least one incorporated shareholder and stand-alone new firms are new firms owned only by
individuals. Total Assets , Fixed Assets , and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wage/Employment
are measured in thousands of Euro per employee.
With Parent
Companies
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
t-stat
# With Parent
Companies
# Stand-Alone
5,039.0
2,251.1
Panel A: Size
855.2
4,183.8
315.2
1,935.9
53.53
46.94
22,746
20,604
58,984
53,675
8.2%
1.7%
Panel B: Profitability
12.8%
-4.5%
5.9%
-4.2%
-16.96
-15.02
16,112
18,580
22,395
25,816
418.3
11.2%
Panel C: Inside Equity
48.4
369.9
8.2%
3.0%
44.14
18.46
22,275
22,670
58,818
58,514
Panel D: Technology
32.4
16.9
31.4
6.1
19.73
21.94
14,357
13,554
18,976
14,468
49.3
37.6
Stand-Alone
Difference
Table A10
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Not Matched on Legal Form
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets or
EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment or Wages/Employment )
of new firms with different ownership structures. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, age, and
calendar year (we do not match on the legal form of incorporation). New firms with parent companies are new firms with at least one
incorporated shareholder and stand-alone new firms are new firms owned only by individuals. Total Assets , Fixed Assets , and Inside Equity are
measured in thousands of Euro. Fixed Assets/Employment and Wage/Employment are measured in thousands of Euro per employee.
With Parent
Companies
Stand-Alone
Difference
t-stat
# With Parent
Companies
# Stand-Alone
4,414.1
1,973.0
Panel A: Size
619.3
3,794.8
240.5
1,732.5
48.35
41.25
18,861
16,764
58,984
53,675
8.5%
1.8%
Panel B: Profitability
13.1%
-4.6%
5.7%
-3.9%
-17.80
-14.34
11,975
14,101
22,395
25,816
Inside Equity
Inside Equity/Total Assets
373.0
11.0%
Panel C: Inside Equity
33.6
339.4
7.7%
3.3%
40.19
20.67
18,398
18,466
58,818
58,514
Fixed Assets/Employment
Wages/Employment
46.9
37.3
Panel D: Technology
29.7
17.3
31.3
6.0
19.45
21.36
10,350
9,448
18,976
14,468
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Table A11
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Sub-Sample of New Firms Incorporated as Private Limited
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets
or EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment or
Wages/Employment ) of new firms with different ownership structures. The sample contains only new firms incorporated as Private Limited
companies. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private
Limited), age, and calendar year. New firms with parent companies are new firms with at least one incorporated shareholder and standalone new firms are new firms owned only by individuals. Total Assets , Fixed Assets , and Inside Equity are measured in thousands of Euro.
Fixed Assets/Employment and Wage/Employment are measured in thousands of Euro per employee.
With Parent
Companies
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Total Assets
Wages/Employment
t-stat
# With Parent
Companies
# Stand-Alone
3,392.1
1,443.5
Panel A: Size
509.0
2,883.1
196.9
1,246.5
44.36
37.14
15,119
13,174
56,663
51,378
8.5%
1.7%
Panel B: Profitability
13.3%
-4.8%
5.8%
-4.0%
-16.57
-13.30
8,727
10,552
20,308
23,527
Panel C: Inside Equity
25.3
202.7
7.6%
2.8%
34.95
16.54
14,699
14,845
56,440
56,156
Panel D: Technology
26.6
15.2
30.6
6.1
16.86
19.58
7,542
6,754
17,097
13,708
228.0
10.4%
41.8
36.8
Stand-Alone
Difference
Table A12
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms:
Robustness to Using Only One Observation Per Firm
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets or
EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment and
Wages/Employment ) of new firms with different ownership structures. The sample of new firms consists of only one observation per new
firm, the one corresponding to the first year in which the firm is observed in the data during the period 2001-2006 with age between one and
three years old. Matching is exact on country of incorporation, three-digit ISIC industry affiliation, legal form (Public Limited or Private
Limited), age, and calendar year. New firms with parent companies are new firms with at least one incorporated shareholder and stand-alone
new firms are new firms owned only by individuals. Total Assets , Fixed Assets , and Inside Equity are measured in thousands of Euro. Fixed
Assets/Employmen t and Wage/Employment are measured in thousands of Euro per employee.
With Parent
Companies
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
Stand-Alone
Difference
t-stat
# With Parent
Companies
# Stand-Alone
3,877.2
1,780.5
Panel A: Size
610.0
3,267.2
243.4
1,537.1
33.57
28.37
10,715
9,451
40,847
37,271
8.1%
1.3%
Panel B: Profitability
12.7%
-4.5%
5.3%
-4.0%
-12.68
-10.62
6,274
7,524
15,868
18,218
304.5
10.6%
Panel C: Inside Equity
33.3
271.2
7.5%
3.1%
27.23
14.75
10,435
10,455
40,680
40,467
45.1
36.5
Panel D: Technology
30.0
15.1
31.1
5.4
12.72
14.33
5,556
4,879
13,721
10,172
Table A13
Characteristics of New Firms with Parent Companies and Stand-Alone New Firms
Robustness to Defining New Firms as those Age 1, Age 2, or Age 3
The table reports the results of matching-based comparisons of the size (Total Assets or Fixed Assets ), profitability (EBITDA/Total Assets or
EBIT/Total Assets ), inside equity (Inside Equity or Inside Equity/Total Assets ), and technology (Fixed Assets/Employment and
Wages/Employment ) of new firms with different ownership structures. In Panel A, new firms are defined as those with age 1. In Panel B, new
firms are defined as those age 2. In Panel C, new firms are defined as those age 3. Matching is exact on country of incorporation, three-digit
ISIC industry affiliation, legal form (Public Limited or Private Limited), age, and calendar year. New firms with parent companies are new
firms with at least one incorporated shareholder and stand-alone new firms are new firms owned only by individuals. Total Assets , Fixed
Assets , and Inside Equity are measured in thousands of Euro. Fixed Assets/Employment and Wage/Employment are measured in thousands of
Euro per employee.
With Parent
Companies
Stand-Alone
Difference
t-stat
# With Parent
Companies
# Stand-Alone
3,604.5
1,662.9
7.7%
0.7%
263.7
11.5%
42.1
38.3
Panel A: New Firms Are Those Age 1
561.2
3,043.3
15.83
215.2
1,447.7
13.51
12.9%
-5.2%
-6.98
5.4%
-4.6%
-6.15
26.7
237.0
12.95
10.2%
1.3%
2.73
30.4
11.7
5.26
33.9
4.4
5.73
2,528
2,215
1,408
1,795
2,474
2,450
1,423
1,167
9,145
8,081
3,579
4,235
9,146
9,085
3,535
2,676
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
3,925.7
1,771.3
8.6%
1.6%
294.3
10.6%
45.8
38.1
Panel B: New Firms Are Those Age 2
634.7
3,291.0
253.6
1,517.7
12.8%
-4.2%
5.7%
-4.0%
34.2
260.1
7.5%
3.1%
30.0
15.8
32.1
5.9
26.25
21.97
-8.87
-8.12
20.72
11.44
10.07
11.75
6,425
5,641
3,826
4,557
6,285
6,303
3,320
3,021
23,268
21,066
8,153
9,455
23,236
23,122
6,749
5,155
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
4,443.9
1,944.0
9.0%
2.3%
376.1
10.7%
45.4
36.2
Panel C: New Firms Are Those Age 3
757.9
3,686.0
30.33
305.4
1,638.6
25.60
13.5%
-4.5%
-11.38
5.9%
-3.6%
-8.46
40.5
335.6
25.43
7.0%
3.7%
15.30
29.4
16.1
11.80
30.2
6.0
13.63
8,078
7,192
5,095
5,972
7,855
7,896
4,158
3,819
26,571
24,521
10,661
12,126
26,436
26,307
8,687
6,629
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Inside Equity
Inside Equity/Total Assets
Fixed Assets/Employment
Wages/Employment
Figure A1.a: Firms with Parent Companies Affiliated with Groups
vs. Stand-Alone Firms
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1
2
3
4
5 6 7 8
Stand-Alone
9
10 11 12 13 14 15 16 17 18 19 20
Parent Affiliated with Groups
Figure A1.b: Firms with Parent Companies Not Affiliated with Groups
vs. Stand-Alone Firms
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1
2
3
4 5 6 7
Stand-Alone
8
9
10 11 12 13 14 15 16 17 18 19 20
Parent Not Affiliated with Groups
Figure A1. Age Profiles of Profitability. The sample consists of all firms in the European manufacturing
sector (regardless of age) in 2001-2006. The age profiles of profitability (EBITDA/Total Assets ) are
estimated using the regression in equation (1). The figure plots the estimates of α +β a for firms with
parent companies (affiliated with business groups or unaffiliated) and of  a for stand-alone ones (vertical
axis) for each age category a (horizontal axis). The age profiles of profitability are in excess of the
profitability of stand-alone firms older than 20 years in the same country-industry-legal form-calendar year
cell. Figure A1.a plots the age profiles for new firms whose parent companies are affiliated with business
groups and stand-alone ones. Figure A1.b plots the age profiles for new firms whose parent companies
are not affiliated with business groups and stand-alone ones.
Figure A2.a: Enterprise Death Rates Above Median
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1
2
3
4
5
6 7 8 9
Stand-Alone
10 11 12 13 14 15 16 17 18 19 20
Parent Companies
Figure A2.b: Enterprise Death Rates Below Median
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1
2
3
4
5
6 7 8 9
Stand-Alone
10 11 12 13 14 15 16 17 18 19 20
Parent Companies
Figure A2. Age Profiles of Profitability in Industries with High and Low Enterprise Death Rates.
The sample consists of all firms in the European manufacturing sector (regardless of age) in 2001-2006.
The age profiles of profitability (EBITDA/Total Assets ) are estimated using the regression in equation (1).
The figure plots the estimates of α + β a for firms with parent companies and of θ a for stand-alone ones
(vertical axis) for each age category a (horizontal axis). The age profiles of profitability are in excess of the
profitability of stand-alone firms older than 20 years in the same country-industry-legal form-calendar year
cell. An industry’s death rate is defined as the time-average of the ratio of the number of enterprise deaths
in the reference period and the number of enterprises active in the reference period, and is calculated at
the ISIC two-digit level using census data from Eurostat’s Structural Business Statistics for the countries in
our sample. Figure A2.a plots the profiles for firms in industries with enterprise death rates above the
sample median and Figure A2.b plots the age profiles for firms in industries with enterprise death rates
below the sample median.