Pyramidal Ownership and the Creation of New Firms*
Jan Bena and Hernán Ortiz-Molina
ABSTRACT
We study the role of pyramidal ownership in the creation of new firms using a
comprehensive panel of manufacturing firms in Europe. Pyramidal ownership
structures are used to supply inside funds to new firms that are unable to raise enough
external financing, namely, those with large investment requirements and low
pledgeable cash flows. They are also used to finance more capital-intensive new firms,
those that rely more on expensive labor, and those whose projects pay off late. New
firms that need more inside funds are set up through pyramidal ownership links to
parent companies with more resources. 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. This financing advantage is
pervasive in many countries, it 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, The 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 grateful to Heitor Almeida,
Lorenzo Garlappi, Ron Giammarino, Thomas Hellmann, Štěpán Jurajda, Sandy Klasa, Kai Li, Yishay Yafeh, and
seminar participants at the Pacific Northwest Finance Conference 2009 for helpful comments. The authors
acknowledge 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 et al. (2005) for a survey of the empirical
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. For this purpose, we use a large
sample of newly incorporated private firms which are mostly startups and span a wide cross
section of European countries. Our focus on the creation of new firms is of particular 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 financing is
severely hindered by capital market imperfections. We show 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. This strongly supports the theory.
We construct a dataset with almost 57,000 newly established privately held manufacturing
firms in 19 European countries. We observe whether a new firm is appended to an existing firm
through a pyramidal 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 a 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
LaPorta el al. (1999) document ownership concentration around the world. Other studies (e.g., Claessens et al.
(2000), Faccio and Lang (2002), Khanna (2000), and Morck et al. (2000)) document the prevalence of pyramids.
Morck et al. (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’.
1
1
assets added to manufacturing by all new firms in each year. Interestingly, the vast majority of
parent companies are not affiliated with business groups. Hence, pyramidal ownership links are
pervasive, which highlights the need to understand why they arise, the role they play in the
financing of entrepreneurial firms, and the impact they may have on the overall economy.
Almeida and Wolfenzon (2006a) show that new firms with ownership links to parent
companies can arise due to limited pledgeability of cash flows. They consider an opportunity to
set up a viable new firm which can be exploited either by an independent entrepreneur with no
wealth or a family who controls an existing firm. The controlling owner captures a fraction of
the new firm’s cash flows, and thus the new firm can only raise an amount of external financing
equal to the present value of the cash flows pledgeable to outside financiers. The ownership
structure depends on the new firm’s pledgeable NPV, i.e., the present value of the pledgeable
cash flows minus the required investment. When the pledgeable NPV is positive, the new firm
can obtain all the financing externally. Hence, it can be set up by the entrepreneur or the family,
who chooses to control it using a direct ownership stake to avoid sharing the pledgeable NPV
with the minority shareholders of the existing firm. We refer to the firms that can be set up
independently of other companies as new stand-alone firms. When the pledgeable NPV is negative,
the entrepreneur cannot set up the new firm, but the family can if it uses the retained earnings of
the existing firm as inside funds. In this case, the family chooses to set up the new firm through
the pyramidal ownership link to the existing firm because it provides a financing advantage: The
family can supply the new firm with more inside funds and benefits from sharing the new firm’s
negative pledgeable NPV with the minority shareholders of the existing firm. 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 pledgeable cash
flows should be set up by parent companies; conversely, those with small investment
requirements and/or high pledgeable cash flows should be set up as stand-alone firms. To test
this prediction, we note that, for a newly established firm, its size captures the investment
requirement and its profitability is directly related to its pledgeable cash flows. Therefore, our
main analyses compare the size and profitability of new firms with parent companies to those of
stand-alone new firms matched exactly by country, three-digit ISIC industry, legal form, age
since incorporation, and calendar year. Consistent with the theory, we find that new firms with
parent companies are 6.1 times larger and 34.4% less profitable than matched stand-alone ones.
2
These results strongly suggest that pyramidal structures are used to set up new firms which
cannot raise enough external financing as stand-alone firms.
We then break new firms based on whether their parent companies are affiliated with
business groups or not, and compare the firms in each subset to matched stand-alone firms.
New firms with parent companies are larger and less profitable in both cases. This shows that
the financing advantage of a pyramidal ownership link exists independently of the size or
complexity of the organization behind the parent company. We also find that new firms whose
parent companies are affiliated with business groups are larger and less profitable than matched
new firms with unaffiliated parent companies. This suggests that business groups, which
command larger resources, are able to relax new firms’ financial constraints more.
We provide a battery of additional tests to confirm whether the relationship between the
size, profitability, and ownership structures of new firms is indeed due to limited pledgeability of
cash flows. The financing advantage of pyramidal links to parent companies is likely to be used
in setting up new firms whose production technologies are associated with larger investment
requirements. Specifically, new firms that rely more on fixed assets and on expensive skilled
labor have larger funding needs and, given the limited pledgeability of cash flows, such firms
require more inside funds. This suggests that there should be differences in the technologies
used by new firms with parent companies and stand-alone ones. Consistent with this intuition,
we find that, relative to matched stand-alone new firms, those with parent companies have
51.0% larger capital-labor ratios and pay 18.2% higher wages.
Since cash flows far away in the future are more difficult to pledge to outside financiers than
those in early years, the financing advantage of pyramidal links is likely to be used in setting up
new firms whose projects pay off late. Specifically, while new firms with projects that pay off
early are able to obtain external financing as stand alones, those with projects that pay off late
have to rely on inside financing from parent companies. We provide two results which suggest
that the pattern of new firms’ cash flows over time affects the decision about which ownership
structure is used to set them up. The first is that the profitability of new firms with parent
companies increases steadily as we move from younger to older firms and converges to the
profitability of stand-alone firms by age 7. The second is that new firms with parent companies
have longer-maturity debt than stand-alone ones, which means that parent companies allow new
firms to align the maturity of their cash inflows and debt payments.
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 up the new firm indirectly
3
through a parent company than when it sets up the new firm directly. Supporting this view, we
find that the equity-to-assets ratio of new firms with parent companies is 20.8% higher than it is
for stand-alone new firms. In addition, the family’s ability to provide inside funds should depend
on the size of the parent company’s retained earnings. In line with this view, we find that new
firms whose parent companies have high retained earnings have received a larger amount of
inside funds compared to those whose parent companies have low retained earnings.
Our sample includes mostly startups, but might also contain mature firms that were
acquired and re-incorporated as new firms. Although the financing advantage modeled by
Almeida and Wolfenzon (2006a) is the same in both cases, distinguishing between them is
empirically important. In particular, there might be other advantages of pyramidal organizations
which are relevant when they grow by acquisitions (e.g., tax offsets arising from the acquisition
of firms with accumulated losses) but not when they grow by setting up startups. We show that
all of our results hold if we focus solely on startups, which further supports the theory.
The extraction of private benefits or tunneling of cash flows by controlling owners cannot
explain why new firms with parent companies are less profitable. First, new firms have just
begun operations and have little cash flows that could be diverted. Second, it is unlikely that
expropriation of minority shareholders occurs immediately after they invest into the new firm.
Third, diversion is more likely to occur as firms mature, but the profitability of new firms with
parent companies increases as they age and the profitability gap relative to stand-alone new firms
disappears. Fourth, since controlling owners hold large cash flow rights in the new firms with
parent companies in our sample, their incentives to divert cash flows are small. Last, we show
that controlling owners’ cash flow rights and the wedge between their control and cash flow
rights are unrelated to the profitability of new firms with parent companies in our sample.
Our evidence is also inconsistent with the view that the larger size and lower profitability of
new firms with parent companies could arise because their controlling owners set up negative
NPV new firms which provide them with private benefits, i.e., they build empires. First,
controlling owners have large cash flow rights in the new firms with parent companies in our
sample and hence would receive a large fraction of such projects’ negative NPV. Second, the
profitability of new firms with parent companies sharply increases as firms grow older and
converges to the profitability of stand-alone firms. Last, we show that new firms with parent
companies have more productive labor and equally productive fixed assets compared to standalone ones. Hence, new firms with parent companies are unlikely to be negative NPV projects.
4
In our robustness checks, we show that the results hold for new firms in the UK, where the
data coverage is complete, and outside the UK, where coverage is tilted towards larger firms. We
also show that, in our sample, the organizational decision about how to set up a new firm is
unrelated to the need to facilitate cooperation among firms in product markets. Last, our
findings are not explained by differences in enterprise death rates.
Our study sheds new light on why ownership by corporations and firm performance are
related, an issue that has been of interest especially in the context of business groups (e.g.,
Khanna and Palepu (2000), Khanna and Rivkin (2001), Claessens et al. (2002, 2006), Volpin
(2002), Ferris et al. (2003), Joh (2003), Baek et al. (2004), and Masulis et al. (2009)). The relation
is partly due to the selection of projects into ownership structures which can satisfy their
financing needs when they are set up as new firms. We show that this selection biases the
estimated effect of having a corporate owner on firm profitability. The bias stems from the
omission of projects’ unobservable characteristics which, at the time firms are set up, determine
both their ownership structures and profitability. The bias is large in our sample.
The closest paper to ours is Almeida et al. (2010), which shows that firms are placed in
different positions within Korean chaebols depending on their profitability. Specifically, they
find that the firms the family controls through pyramidal links 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 pyramid but directly owns high profitability ones. Both
our study and theirs suggest that limited pledgeability of cash flows gives rise to pyramids, but
they differ in six key aspects. First, we study how organizations expand by setting up new firms
while their analysis is mostly conditional on firms being already part of a chaebol. Second, they
compare firms the family owns pyramidally with those it owns directly, while we compare new
firms with parent companies to new stand-alone firms. Third, their study of chaebols’
expansions is based on acquisitions of mature firms, while the organizations in our sample
expand mostly by creating startups. Fourth, we study organizational decisions in a wide crosssection of European countries whose institutional environments are very different from that in
Korea. Fifth, while they study the decisions of Korean chaebols, we focus mainly on those of
European organizations unaffiliated with business groups, which have not been studied before.
Sixth, we show that new firms added pyramidally to existing firms differ from those set up as
stand alones in capital intensity, average wage, productivity of labor, and timing of cash flows.
Previous work shows how business groups can arise when small organizations grow
pyramidally (Aganin and Volpin (2005)) and that group affiliation is more common in less
5
financially developed countries, especially in industries with high dependence on external finance
or information asymmetry (Belenzon and Berkowitz (2008)). Moreover, business groups use
their internal capital markets to support financially weak members (Morck and Nakamura
(1999), Friedman et al. (2003), and Gopalan et al. (2007)) and sometimes allow members to
share risks (Khanna and Yafeh (2005)). There is also a debate about how business groups affect
the allocation of resources in the economy and ultimately about whether they should be
endorsed or dismantled (e.g., Khanna and Palepu (1999), Khanna (2000), Morck et al. (2005),
Almeida and Wolfenzon (2006b), and Khanna and Yafeh (2007)). Our results suggest that
pyramidal structures play a key role in the financing of new firms which should be considered
when designing public policies.
Our paper is also related to the literature on the access to capital of small firms (e.g.,
Petersen and Rajan (1994), Berger and Udell (1995, 1998), Harhoff and Körting (1998), Cole
(1998), and Berkowitz and White (2004)), the literature on how venture capitalists finance and
monitor startups (e.g., Lerner (1995), Gompers (1995), Hellmann and Puri (2000, 2002), and
Kaplan and Strömberg (2003)), the studies of the effect of regulatory requirements on firm entry
(e.g., Klapper et al. (2006)) and, more broadly, 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 our conceptual
framework. Section 3 describes the data. Section 4 introduces the empirical methodology.
Section 5 compares the characteristics of new firms with parent companies and stand-alone
ones, and discusses alternative interpretations of our results. Section 6 studies the selection bias
in regressions of firm performance on ownership by corporations. Section 7 discusses the
robustness of our main results. Section 8 concludes.
2. Conceptual Framework
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 which 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
6
individual. Consider instead a situation in which, due to frictions, the present value of the cash
flows pledgeable 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 net present value is R P − I . If R P ≥ I , the new firm can again 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 . In this last case, 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 up-front investment and/or high pledgeable cash flows.
Now further assume that the new firm can be set up by two types of individuals: An
independent entrepreneur 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 < α < 1 (minority shareholders
own the remaining shares). 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, αRE , 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’. Importantly, the pyramidal structure allows the family to supply the
new firm with a larger amount of inside funds.
Using this framework, Almeida and Wolfenzon (2006a) derive two results. First, 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 net present value with the minority
shareholders of the existing firm. Second, 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.
The above discussion implies that 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
7
the new firm, but the family does it through the creation of a pyramidal ownership link
(provided it can supply sufficient inside funds). Hence, the new firm is directly controlled by an
existing firm and we refer to such firms as new firms with parent companies.
In sum, if the limited pledgeability of cash flows affects the organizational decision of how
to set up new firms as described by Almeida and Wolfenzon (2006a), then new firms’ ownership
structures and their characteristics should be related. Specifically, new firms with small
investment requirements and/or high pledgeable cash flows need a small amount of inside funds
and are more likely to be set up as new stand-alone firms. In contrast, new firms with large
investment requirements and/or low pledgeable cash flows require a large amount of inside
funds and are more likely to be set up as new firms with parent companies. For new firms that
are set up, the values of their assets capture the investment requirements and their profitability is
directly related to the pledgeable cash flows. Thus, the main hypothesis we take to the data is:
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 and less profitable than new stand-alone firms.
The null hypothesis is that limited pledgeability of cash flows does not affect the
organizational decisions of how to set up new firms, in which case the size and profitability of
new firms should be unrelated to their ownership structures. Hence, our main empirical tests
compare the size and profitability of new firms with parent companies with those of stand-alone
ones. Noteworthy, if Almeida and Wolfenzon (2006a) correctly describe the process by which
new firms are created, then the magnitudes of the differences quantify the severity of the
frictions that cause limited pledgeability of cash flows. We also study whether the nature of new
firms’ business projects, which affects R P and I , is related to their ownership structures, and
whether parent companies with higher RE relax new firms’ financial constraints by more.
3. Data, Variables, and Summary Statistics
3.1. Data Sources
We use a firm-level database, the full version of Amadeus, which is created by Bureau Van
Dijk (BvD) by harmonizing data from European companies’ annual reports across countries.
BvD collects the data from about 50 vendors across Europe (mainly company registrars of
national statistical offices, credit registries, stock exchanges, and regulatory filings). Amadeus
contains financial information about 7 million private and public companies spanning all sectors
of the economy in 38 European countries. Coverage is limited in some countries, but in 23
8
countries it is comparable and representative of the population of firms as reported in aggregate
data by the European Commission (see Arellano et al. (2009)). The key advantage of Amadeus is
that it covers small and 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. 2 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.
For each firm, Amadeus identifies the shareholders and reports their ownership stakes. This
allows us to classify shareholders into corporations or individuals and to identify the controlling
owners. Each Amadeus update provides the ownership information as of the most recent date
BvD was able to verify it. To construct an annual panel of ownership data, which can be
matched to companies’ financials, we use seven Amadeus DVD updates: May 2001, May 2002,
July 2003, May 2004, October 2005, September 2006, and May 2007. We supplement this data
with more recent updates of Amadeus downloaded from WRDS in July 2007, April 2008, and
August 2009. Finally, we also use ownership data from Orbis, BvD’s product with world-wide
coverage, which was issued in November 2008. The resulting ownership panel dataset gives a
unique breadth of cross-sectional coverage over the period 2001-2008.
3.2. Sample of New Firms
We focus on manufacturing firms, i.e., those with three-digit International Standard
Industry Classification (ISIC) codes 151 to 366. We drop firms whose activities are only defined
at the two-digit level and four countries (Belgium, Finland, Netherlands, and Sweden) for which
the ownership data of small firms is incomplete. We use only firms with more than €1,000 in
total assets which have non-missing ownership data. We drop firms less than one year old
because 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 only
when they reach ages 2 or 3 years since incorporation. To avoid misrepresenting the population
2
For example, a firm that stops filing in 2003 (i.e., 2002 is the last year for which it filed) remains in the database
until 2006 and all of its records are removed from the database starting with the 2007 update.
9
of new firms, we identify new firms as those with ages 1 to 3 (see Klapper et al. (2006) for a
similar approach). Our final sample contains 56,888 new firms in 19 countries and in 100 threedigit ISIC manufacturing industries during 2001-2006 for which we have both accounting and
ownership data.
3.3. Definition of Main Variables and Summary Statistics
We capture firm size using two variables, Total Assets and Fixed Assets, both at book values
and measured in millions of Euro. Our measures of profitability 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). We proxy
for a firm’s technology using the capital-labor ratio defined as fixed assets in thousands of Euro
per employee (Fixed Assets/Employment), and the average annual wage in thousands of Euro per
employee (Wages/Employment). We use three variables which measure the maturity structure of a
firm’s debt. The first two are Short-Term Debt/Total Assets and Long-Term Debt/Total Assets, where
we define short-term debt as debt with a maturity of up to one year and long-term debt as that
which matures in more than one year. The third is Fraction of Long-Term Debt, which is long-term
debt divided by the sum of short- and long-term debt. We measure the extent of equity
financing in a firm’s capital structure using Equity/Total Assets. Last, we measure the productivity
of labor using Sales/Employment (in thousands of Euro per employee) and the productivity of
fixed assets using Sales/Fixed Assets (in Euro per €1 of fixed assets).
Table 1 reports summary statistics for our sample of new firms. In the calculation of these
statistics, as well as throughout our analyses, we drop observations in the top and bottom 1% of
the distribution of each variable to remove outliers. The median (mean) size of new firms
measured by Total Assets is €0.22 (€1.93) million and it ranges from €0.02 million at the 10th
percentile of the distribution to €3.15 million 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 new firm has a capital-labor ratio of €15.61
thousand per employee and it pays an average annual wage of €31.29 thousand. The median new
firm has a short-term debt to total assets ratio of 46.0% and a long-term debt to total assets ratio
of only 3.8%. Also at the median, the fraction of total debt that is long-term is 8.6%. The
median new firm’s equity to total assets ratio is 2.0%. Last, the median new firm generates sales
10
of €110.89 thousand per employee or €7.54 per €1 invested in fixed assets. In sum, the typical
private new firm in our sample is small, financed with short-term debt, and profitable.
3.4. Ownership Structure of New Firms
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. For new firms with parent companies, we calculate the
control stake of their ultimate corporate shareholder, i.e., of the corporation at the top of the
ownership pyramid (which in turn is either controlled only by individuals or is widely held).
Specifically, we sum the control stakes over all ownership chains that link (directly or indirectly)
the ultimate corporate shareholder and the new firm. For each of such ownership chains, we
calculate the control stake as the minimum ownership stake in the chain. This algorithm is
needed as some new firms have parent companies which are in turn linked to other firms, which
could be linked to yet other firms, etc. When the organization consists of a new firm appended
to a single parent company owned solely by individuals, the control stake of the ultimate
corporate shareholder is simply the parent company’s direct stake in the new firm.
We further classify new firms with parent companies into those whose parent companies
are affiliated with a business group 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.
Table 2 reports the ownership patterns of new firms for each of the years in our sample.
Panel A reports the number of new firms and Panel B reports the total assets these new firms
bring into the economy. The number of new firms increases from 4,695 in 2001 to 22,800 in
2006, mostly as a result of the improved coverage of very small new stand-alone firms. 3 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.
Table 2 shows a striking pattern in the ownership structure of new firms. Focusing on the
year 2006, 22.9% of new firms have parent companies while 77.1% are stand-alone. In contrast,
new firms with parent companies account for 75.7% of the assets added to the economy by all
3
Existing firms are typically required to disclose their ownership stakes in other firms and thus new firms with
parent companies are consistently covered in all years.
11
new firms and new stand-alone firms account for 24.3%. This highlights the need to understand
why some new firms are born with parent companies while others are born as stand alones.
Only a very small number of new firms have parent companies affiliated with business
groups, buy they account for a large fraction of the assets added to the economy by all new
firms. In 2006, only 2.9% of new firms are affiliated with business groups but they account for
27.3% of the new assets. 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 new firms with unaffiliated parent companies. The strong
presence of these organizations suggests that pyramidal links provide advantages that are
unrelated to the objectives of gaining market power or political influence often associated with
the expansion of business groups.
In Table 3, we report information on the control stakes of ultimate corporate shareholders
in the 5,227 new firms with parent companies incorporated in 2006. Panel A shows that the
mean (median) control stake of ultimate corporate shareholders is 65.0% (66.0%), and it ranges
from 16.0% at the 10th percentile of the distribution to 100.0% at the 90th percentile. Panel B
reports the frequency of new firms in various ranges of control stakes. We observe that 79.4%
of new firms have control stakes greater than or equal to the 33% threshold and 68.6% have
control stakes greater than or equal to the 50% threshold. The control stakes are typically
smaller for new firms whose parent companies are affiliated with business groups. Still, 74.7% of
new firms have control stakes greater than or equal to the 33% threshold and 56.8% have
control stakes greater than or equal to the 50% threshold. The magnitudes of the control stakes
in our sample are way above the thresholds commonly considered in the literature as sufficient
for control of the firm. 4 In sum, ultimate corporate shareholders typically control new firms, i.e.,
they are insiders.
3.5. Cross-Sectional Variation in Ownership, Size, and Profitability of New Firms
In Table 4, we use data for 2006 to describe the variation in the ownership structure, size,
and profitability of new firms across countries, industries, and legal forms. Panel A shows that
the fraction of new firms with parent companies goes from 8.2% in Ireland to 97.3% in Italy.
4
For example, Faccio and Lang (2002) and Masulis et al. (2009) use thresholds of 10% or 20%.
12
There is also significant variation across countries in the median size and profitability of new
firms. 5 For example, new firms in the UK are small and highly profitable, while Italian new
firms are very large and have low profitability. In addition, there is variation in the number of
new firms and in the value of the assets they add to the manufacturing sector. This heterogeneity
is driven by factors such as financial development, regulatory environment, or the size of the
manufacturing sector, and by differences in the coverage of new firms in Amadeus. Panel B
shows that there is a large variation across two-digit ISIC industries 6 in the number of new firms
and the value of the assets they add to the manufacturing sector, as well as in the fraction of new
firms with parent companies and their average size and profitability.
Panel C 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 and less profitable, and more likely to have parent companies.
In sum, there is substantial variation in the ownership structure, size, and profitability of
new firms across countries, industries, and legal forms. Unobservable factors which are the
source of these three levels of variation could cause an association between the ownership
structure, size, and profitability of new firms for reasons other than the financing advantage of
pyramidal ownership links described in Section 2. For example, parent companies may be more
prevalent in less financially developed countries, perhaps because they substitute for missing
markets, and such countries may also have higher barriers to entry which results in larger new
firms (Klapper et al. (2006)). One would then observe that new firms with parent companies are
larger than stand-alone ones. Hence, Table 4 stresses the need to control for country, industry,
and legal form in our analyses. We now discuss the approach we use.
There are a few countries (Ireland, Latvia, Lithuania, and Russia) in which we are unable to calculate the
profitability of new firms due to missing data. These countries drop from our tests that use profitability measures.
6 For brevity, we report statistics for two-digit ISIC industries, but all our analyses control for differences across
three-digit ISIC industries.
5
13
4. Methodology
4.1 Within Country-Industry-Legal Form Variation in Ownership, Size, and Profitability
We start by describing the variation in the data that underlies our results. For each country,
three-digit ISIC industry, and legal form cell, we separately compute the average size (measured
by Total Assets) and the average profitability (measured by EBITDA/Total Assets) of new firms
with parent companies and stand-alone ones across all years in our sample. Figure 1a plots these
averages and shows that, in most country-industry-legal form cells, new stand-alone firms have
average profitability in the 5%–20% range and are on average smaller than €1 million. In
contrast, in many more country-industry-legal form cells, new firms with parent companies have
average profitability below 5% and are on average larger than €1 million. Next, we calculate the
differences in the average size and the average profitability between new firms with parent
companies and stand-alone ones in the same country-industry-legal form cell. Figure 1b plots
these differences and shows a striking concentration in the upper-left quadrant: New firms with
parent companies are significantly larger and less profitable than stand-alone ones, controlling
for country, industry, and legal form.
This initial evidence is consistent with the hypothesis that, due to limited pledgeability of
cash flows, new firms with parent companies are larger and less profitable than stand-alone new
firms. In the next section, we introduce a methodology that allows us to properly quantify the
differences in size and profitability between new firms with parent companies and stand-alone
ones reported in Figure 1b and to assess the statistical significance of these differences.
4.2. Matching
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 on the basis
of key variables. We then compute the average difference in the characteristic of interest across
the two types of new firms. Specifically, we use Mahalanobis-metric matching (see Rubin (1980))
using the kernel method as implemented in STATA by Leuven and Sianesi (2003). 7 We match
on country of incorporation, three-digit ISIC industry affiliation, legal form of incorporation,
firm age since incorporation, and calendar year. All these variables are entered as sets of
dummies. We also match on the propensity score estimated in the first-stage using these
Our results are robust to changes in the matching metric and in the matching method: For example, all the results
in the paper are analogous if we use the propensity-score metric and the five-nearest neighbors matching method.
7
14
variables. Matching requires a sufficiently large overlap between the distributions of the
matching variables across the two groups of new firms. The cross-sectional richness and detailed
coverage of our data ensures that this ‘common support’ condition is satisfied.
To better understand this methodology, recall that we match on 19 countries, 100
industries, 2 legal forms, 3 firm ages (1, 2, and 3 years old), and 6 calendar years. Thus, we
compare new firms with parent companies to new stand-alone ones inside 68,400 different cells
(provided that a cell contains new firms of both types). The variation left in the data after such
matching reflects within country-industry-legal form-age-calendar year differences in the types of
projects undertaken by new firms with parent companies and stand-alone ones. For example,
our matching controls for the time-varying growth opportunities in each country-industry cell,
which affect the creation of new firms. As a result, the relation between new firms’ ownership
structures and their characteristics (e.g., size and profitability) we identify is due to factors that
are likely to drive the organizational decision we want to study. Also, using this approach,
differences in the coverage of new firms across countries do not drive our results.
There are important advantages of matching over a regression of size or profitability on an
indicator for whether the firm has a parent company and the control dummy variables (i.e.,
country, industry, age, legal form, and year dummies). First, regression imposes linearity both on
and off the common support, while matching works only on the common support and is nonparametric, which makes it robust to model misspecification. Second, a regression with
interactions among all the control dummy variables can come close to matching, but still differs
in the weighting of observations when computing the estimates. Matching gives more weight to
cells with a higher fraction of matched firms, while regression gives more weight to cells where
the fraction of all observations in each of the two groups of firms is similar, regardless of the
number of matches (Angrist (1998)).
5. The Role of Parent Companies in the Financing of New Firms
5.1. Size and Profitability
Table 5 reports the differences in size and profitability between new firms with parent
companies and stand-alone new firms 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.
New firms with parent companies have Total Assets (Fixed Assets) which exceed those of matched
stand-alone new firms by €3.44 (€1.57) million. These differences are highly statistically
significant (with t-statistics of 43.12 and 36.40, respectively) and also economically significant.
15
When measured by total assets (fixed assets), new firms with parent companies make initial
investments that are 6.1 (6.8) times larger than those made by stand-alone ones. 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 new firms. These differences are
highly statistically significant (with t-statistics of 15.95 and 13.13, respectively) and also
economically significant: The profitability of new firms with parent companies is 34.4% (68.4%)
lower than it is for stand-alone ones. These results support the view that parent companies use
the financing advantage of pyramidal ownership links to set up new firms with larger investment
requirements and lower pledgeable cash flows. In other words, they suggest that new firms ‘self
select’ into ownership structures based on their investment requirements and pledgeable cash
flows. 8
In Panels B and C, we distinguish between parent companies affiliated with business groups
and unaffiliated parent companies. Specifically, in Panel B, we match new firms whose parent
companies are affiliated with business groups to stand-alone new firms, while, 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 and less profitable than matched stand-alone new firms. These
results hold for both measures of firm size and profitability, and are always highly statistically
and economically significant. Note that the results cannot be directly compared across panels as
the sets of industry-country-legal form-calendar year cells on which they are based are different.
In sum, we find that parent companies play an important role in the financing of new firms both
inside and outside business groups.
Nevertheless, parent companies affiliated with business groups typically command more
resources than unaffiliated ones and, as a result, they should be able to set up new firms with
larger investment requirements and lower pledgeable cash flows. To assess this argument, in
Panel D, we directly compare new firms with affiliated parent companies to matched new firms
with unaffiliated ones. The Total Assets (Fixed Assets) of new firms with affiliated parent
companies exceed those of new firms with unaffiliated ones by €6.27 (€3.11) million. These
differences are statistically significant. The profitability of new firms with affiliated parent
New firms with parent companies may be larger if parents ‘incubate’ new ventures within the organization until
they are ‘mature enough’ to be incorporated separately. If this is the case, then new firms with parent companies
should be more mature and thus more profitable. However, we find that new firms with parent companies are less
profitable than stand-alone ones. Also inconsistent with the incubation view, in Section 5.3, we show that the
profitability of firms with parent companies increases with firm age, which is not typical of mature firms.
8
16
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 but the second is not. These
results provide further evidence that new firms self select into ownership structures which allow
them to obtain sufficient inside funds.
5.2. Technology
We now examine why new firms with parent companies are larger than stand-alone ones.
The financing advantage of pyramidal links to parent companies is used to set up new firms that
need a large amount of inside funds. Under the assumption that the present value of the cash
flows a new firm can pledge to outside financiers per €1 of required investment is constant, the
amount of inside funds needed to set up a new firm increases proportionally with the required
investment. Large investment requirements are often associated with production technologies
that rely more on fixed assets and on expensive skilled labor. Hence, we expect that capitalintensive new firms and those using expensive labor are set up with parent companies. In
contrast, we expect that labor-intensive firms and those that rely on cheap labor are set up as
stand alone.
In Table 6, we use matching to compare the capital-labor ratio and wage per employee of
new firms with parent companies to those of stand-alone ones. Panel A shows that new firms
with parent companies have fixed assets of €44.96 thousand per employee while stand-alone
new firms have only €29.78 thousand per employee. This difference of €15.17 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
€37.22 thousand per employee while stand-alone new firms pay only €31.48 thousand. The
difference of €5.74 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 show that new firms self select into
ownership structures that satisfy the investment needs driven by 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 average wages relative to matched stand-alone new firms, regardless of whether
17
their parent company is affiliated with a business group or not. This reinforces the view that the
financing advantage of pyramidal ownership links is not specific to parent companies affiliated
with business groups. In Panel D, we directly 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, business
groups play an important role in the financing of new firms with large investment requirements.
5.3. Pattern of Cash Flows Over Time
We now examine why new firms with parent companies are less profitable than stand-alone
ones. One possibility is that the two types of new firms differ in the pattern of their cash flows
over time and therefore in the amount of cash flows they can pledge to outside financiers in
their early years of operation. The moral hazard and asymmetric information problems that
hinder new firm’s access to external financing are more severe for longer-maturity projects. As a
result, the cash flows in future years of operation are more difficult to pledge to outside
financiers than those in early years. Hence, the timing of cash flows affects the amount of
external financing new firms can raise. New firms whose projects pay off early need less inside
funds, and can be set up as stand-alone firms. In contrast, new firms whose projects pay off late
need more inside funds, and should be set up through parent companies.
To assess the argument above, we follow the approach used in the labor economics
literature which studies how a firm’s productivity and wages change as its workforce grows older
(e.g., Hellerstein et al. (1999), Haltiwanger et al. (1999)). These studies typically rely on a single
cross section of data or on short annual panels, and estimate the age profiles of productivity and
wages by tracing the productivity and wages of firms with workforces in different age categories.
Using a similar approach, we compare the age profile of the cash flows generated by firms with
parent companies to the age profile of the cash flows generated by matched stand-alone ones
over the age range 1-20 years old since incorporation. 9 Specifically, for each firm with a parent
company and age s years old in a given calendar year, we use matching to find the set of standalone firms with age s in the same calendar year, as well as the same country of incorporation,
three-digit ISIC industry affiliation, legal form, and listed vs. non-listed status. 10 We then plot
the cash flows of both types of firms over the ages 1-20 years.
The sample of firms with age 1-20 years has 848,914 firm-year observations, of which 41.6% correspond to firms
with parent companies, and it spans the period 2001-2006.
10 We also match on listed status because 0.5% of the firm-year observations correspond to publicly traded firms.
9
18
Figure 2a shows that the cash flows of new firms with parent companies measured by
EBITDA/Total Assets increase from 7% at age 1 to 11% at age 6, and remain at this higher level
over the older ages. In contrast, the cash flows of stand-alone firms exhibit a mildly decreasing
trend, from 13% for young firms to 11% for mature firms. As a result, there is a strong
convergence in the cash flows of the two types of firms between ages 1 to 6, and the gap largely
disappears by age 7. This suggests that new firms with projects that pay off early obtain
sufficient external financing and are set up as stand-alone firms, while new firms with projects
that pay off late are set up only if parent companies supply them with inside funds.
In Figures 2b and 2c, we distinguish between firms whose parent companies are affiliated
with business groups and those with unaffiliated parent companies, and compare each set to
matched stand-alone firms. We find that the convergence in the cash flows of firms with parent
companies to those of matched stand-alone firms by age 7 occurs regardless of whether the
parent is affiliated or not. Last, in Figure 2d we directly compare firms whose parent companies
are affiliated to those with unaffiliated parent companies. We find that the age profiles of the
cash flows are similar for both sets of firms with parent companies.
We now shed further light on the differences in the timing of cash flow between new firms
with parent companies and stand-alone ones by comparing their debt maturity structures. New
firms whose projects pay off in the more distant future need longer-term financing, which allows
them to align the maturity of their cash inflows and debt payments. However, lenders cannot
provide them with long-term loans because of the limited pledgeability of such cash flows. In
this scenario, parent companies may pledge their own assets as collateral, make new firms more
credible with outside financiers through their track record in capital markets (Khanna and
Palepu (2000)), or provide financial support in case of distress (Gopalan et al. (2007)). Hence,
parent companies may allow new firms to increase the maturity of their debt. This suggests that
new firms with parent companies should have longer-maturity debt than stand-alone ones.
Panel A of Table 7 shows that new firms with parent companies have lower short-term debt
to total assets ratios and higher long-term debt to total assets ratios than matched stand-alone
new firms. Also, long-term debt accounts for 32.1% of the total debt carried by new firms with
parent companies and for only 26.8% of the total debt carried by stand-alone ones. The
difference of 5.4 percentage points is statistically significant (t-statistic 10.31) and also
economically significant: The fraction of total debt that is long term is 20.1% higher for new
firms with parent companies than it is for stand-alone new firms. These findings suggest that
parent companies allow new firms to match the maturity of their cash inflows and debt
19
payments, and support the view that new firms with longer-term projects are set up through
parent companies.
Panels B and C show that, relative to their respective stand-alone counterfactuals, new firms
with parent companies have longer-maturity debt regardless of whether their parent company is
affiliated with a business group or not. Finally, Panel D shows that new firms with affiliated
parent companies have longer-maturity debt than new firms with unaffiliated parent companies.
In sum, ownership by a parent company generally allows new firms to have longer-maturity
debt, and even more so when the parent company is affiliated with a business group.
5.4. Equity Financing and Parent Companies’ Retained Earnings
The key mechanism behind the financing advantage of pyramidal ownership links is that the
family supplies the new firm with more inside funds when it is set up indirectly through a parent
company than when it is set up 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. This means that new firms with parent companies should be endowed with a larger
amount of initial equity financing than stand-alone new firms.
Panel A of Table 8 shows that the equity-to-assets ratio is 15.1% for new firms with parent
companies and 12.5% for matched stand-alone new firms. The 2.6 percentage point difference is
highly statistically significant (t-statistic 11.79) and also economically significant: The equity-toassets ratio of new firms with parent companies is 20.8% higher than it is for stand-alone new
firms. Panels B and C show that these differences in equity financing between new firms with
parent companies and stand-alone new firms are present regardless of whether the parent
companies are affiliated with business groups or not. Panel D further shows that the equity-toassets ratios of new firms with affiliated parent companies are larger than those of new firms
with unaffiliated parent companies. In sum, we show that new firms with parent companies have
higher equity-to-assets ratios and, given their larger size, they have received a much larger
amount of inside funds.
The conceptual framework also suggests that parent companies’ retained earnings are
directly related to the amount of inside funds they can supply to new firms. As a result, new
firms with larger investment requirements, which need more inside funds, should be set up by
parent companies with more retained earnings. In Table 9, we use new firms with parent
companies to study whether parent companies’ retained earnings affect the size and equity-toassets ratios of new firms. For this purpose, we split the sample into new firms whose parent
20
companies have retained earnings above and below the sample median. We find that new firms
whose parent companies have high retained earnings are significantly larger in terms of total
assets or fixed assets than are those whose parent companies have low retained earnings. This
result holds regardless of whether the parent company is affiliated with a business group or not.
There is no difference in the equity-to-assets ratios, but new firms with parent companies with
retained earnings above the sample median have received a larger amount of inside funds.
5.5. New Firms with Parent Companies: Startups vs. Acquisitions
The size of the typical new firm in our data (€220 thousand at the median), as well as the
large sample size, suggest that most new firms are startups, but the sample might also contain
some mature firms that were acquired and re-incorporated as new legal entities. According to
the conceptual framework in Section 2, the family’s organizational decision about how to set up
a new firm is the same regardless of whether the new firm is a startup or an acquired mature
firm. In both cases, the family decides whether to control the new firm directly or indirectly
through a pyramidal ownership link depending on the amount of inside funds the new firm
requires. Hence, from the perspective of the organizational decision we study, the distinction
between startups and acquisitions is not essential.
Nevertheless, it is useful to distinguish between startups and acquired firms for two reasons.
First, with few additional assumptions, the conceptual framework has straightforward
implications for which type of new firm (startup or acquired firm) requires more inside funds.
Specifically, assuming that the present value of the cash flows a new firm can pledge to outside
financiers per €1 of required investment is constant, then the amount of inside funds needed to
set up a new firm increases proportionally with the required investment. Further assuming that
this pledgeability ratio is the same for acquired firms and startups, and that acquisition targets
are larger than startups, it follows that setting up new firms through acquisitions requires more
inside funds than setting up startups. 11 Hence, new firms created through acquisitions are more
likely to be set up by parent companies, and especially by those with more resources.
The second reason is that, in addition to the financing advantage modeled by Almeida and
Wolfenzon (2006a), there might be other advantages of pyramidal structures which are present
The present value of pledgeable cash flows per €1 of required investment may be higher for acquired firms than
for startups if diversion is easier in startups which have no track record and are more risky. Hence, even if the
acquisitions of existing firms involve larger investments than startups, it is not entirely obvious that setting up a
new firm through an acquisition should require more inside funds. However, if the extent of diversion is largely
driven by country-level factors (e.g., the degree of investor protection), then there should be little difference in the
present value of pledgeable cash flows per €1 of required investment across startups and acquired firms.
11
21
when organizations grow by acquisitions but not when they grow by setting up startups. For
example, the controlling owner of a pyramidal structure may make a company in the
organization acquire a firm with accumulated losses to reduce the organization’s tax bill. If the
merged entity is re-incorporated, then we could observe the creation of a new firm with a parent
company, and the new firm’s characteristics would reflect those of the merged entities. This
argument suggests that, if acquisitions are prevalent in our sample, then new firms with parent
companies could have lower profitability and larger size than matched stand-alone firms for
reasons other than the financing advantage of pyramidal structures.
To discern between startups and acquired firms, we use BvD’s Zephyr database, which
contains information on the M&A activity of public and private European firms since 1997. The
key advantage of Zephyr is that firms are assigned the same identification numbers they have in
Amadeus. If a merged firm is re-incorporated as a new firm after the merger is completed, the
new firm’s identification number is not recorded in Zephyr as part of the M&A deal, and hence
we cannot identify it in Amadeus. However, we can use Zephyr to separate parent companies
that act as acquirers from those that do not. Specifically, using a conservative approach, we
classify a new firm as a startup if none of the firms to which it is linked directly or indirectly
through ownership engaged in an acquisition during the period 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.
Based on this classification, three quarters of the new firms with parent companies in our
sample are startups, while the remaining quarter falls in the dubious category. 12 Not surprisingly,
consistent with the view that setting up new firms by acquisition requires a larger investment
than setting up startups, the median total assets of dubious new firms are €4.67 million and the
median total assets of startups are €0.70 million. In addition, dubious new firms account for a
sizeable 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 show that
business groups, which command a larger pool of resources, are more likely to expand by setting
up large new firms through acquisitions. This also explains the results in Panels B and C of
Table 5, which show that the size gap between new firms with parent companies and matched
stand-alone ones is much larger when the parent companies are affiliated with business groups.
With this approach we incorrectly classify some true startups as dubious if a firm in the organization made an
unrelated acquisition, but we use this approach intentionally to identify new firms which are surely startups. Hence,
three quarters is a conservative lower bound for the fraction of startups in our sample.
12
22
In Table 10, we report the differences between startups with parent companies and matched
stand-alone new firms. Consistent with our earlier results, startups with parent companies are
significantly larger and less profitable than matched stand-alone new firms. They are also more
capital intensive, pay higher wages, have longer-maturity debt, and have higher equity-to-assets
ratios. The magnitudes of the differences are comparable to those reported in Panel A of Tables
5, 6, 7, and 8, which are based on the full sample of new firms (including dubious firms). The
exception is the size difference, which is still statistically and economically significant but smaller
in magnitude. This is because the larger new firms with parent companies classified as dubious
are excluded from the sample. In addition, the age profile of the cash flows generated by
startups with parent companies (not reported) is similar to that in Figure 2a for all firms with
parent companies. Likewise, all other results reported in the paper are robust to the exclusion of
dubious new firms with parent companies from the sample. In sum, pyramidal ownership links
provide a financing advantage in setting up new firms which are surely startups.
5.6. Is the Low Profitability of New Firms with Parent Companies Due to Tunneling?
New firms with parent companies have lower profitability than matched stand-alone ones.
This result, together with our other findings, suggests that new firms with little pledgeable cash
flows are set up by parent companies which provide them with inside funds. An alternative
interpretation is that the difference in profitability arises because the controlling owners of new
firms with parent companies divert more of new firms’ cash flows to themselves than those of
stand-alone new firms. 13 First, controlling owners consume private benefits both in new firms
with parent companies and in stand-alone ones, but such perk consumption might be more
prevalent in new firms with parent companies. 14 Second, in new firms with parent companies,
the wedge between controlling owners’ cash flow and control rights gives them incentives to
tunnel new firms’ cash flows towards the firms in upper layers of the pyramid. This cannot
happen in stand-alone new firms.
Expropriation of minority shareholders by controlling owners is unlikely to be a severe
problem in the new firms with parent companies in our sample. First, our tests concern newly
created firms that have just begun operations, and thus neither have valuable assets nor have
This alternative interpretation follows from previous work on family business groups which finds that pyramidal
ownership reduces firm performance (Claessens et al. (2002, 2006), and Joh (2003)), possibly through the diversion
mechanism (Bertrand et al. (2002), Bae et al. (2002), and Baek et al. (2006)).
14 The consumption of private benefits of control in new firms with parent companies could be higher or lower
than in new stand-alone firms. However, differences in the extent of perk consumption can only explain our
results if it is more prevalent in new firms with parent companies.
13
23
cash flows that can be diverted. Second, it is implausible that expropriation occurs immediately
after the minority shareholders invested into the new firm. If that were the case, one would not
observe any new firm with minority shareholders. Third, both arguments above suggest that
diversion of cash flows is more likely to occur as firms mature and hence the age profile of the
profitability of new firms with parent companies should be decreasing. But Figures 2a-2c show
that the opposite holds true. Fourth, controlling owners have large incentives to expropriate
minority shareholders only if their cash flow rights in the new firm are small and thus minority
shareholders are entitled to a large fraction of the cash flows. At the extreme, if the controlling
owner holds 100% of the cash flow rights, there is no incentive to expropriate. In our data, the
ultimate corporate shareholders of new firms with parent companies have median cash flow
rights of 63% and in a quarter of these new firms they have 100% of the cash flow rights. 15
The discussion above suggests that diversion of cash flows by controlling owners is unlikely
to explain the lower profitability of new firms with parent companies. Nevertheless, in Table 11,
we use the sample of new firms with parent companies to conduct two additional tests that
provide evidence inconsistent with the diversion explanation. In Panel A, we split the sample
into new firms whose ultimate corporate shareholders have cash flow rights below and above
the sample median. If there is diversion of cash flows, then the profitability of new firms should
be lower when the cash flow rights of ultimate corporate shareholders are below the sample
median. However, for both measures of profitability, we find no statistically significant
difference in the profitability of the two groups of new firms.
In Panel B, we study whether the wedge between the control and cash flow rights of the
ultimate corporate shareholder (defined as the ratio of control rights to cash flow rights) affects
the profitability of new firms. For this purpose, we focus on new firms with wedges greater than
one, i.e., on new firms in which incentives to tunnel cash flows exist, and then split the sample
into new firms with wedges above and below the sample median. If there is tunneling, then it
should be more pervasive for new firms with wedges above the median and hence those new
firms should be less profitable. Contrary to this intuition, for both measures of profitability, we
find no statistically significant difference in the profitability of the two groups of firms. In fact,
profitability is higher for new firms with wedges above the median.
To compute the cash flow rights, we sum the cash flow stakes across all ownership chains that link (directly or
indirectly) the ultimate corporate shareholder and the new firm. For each of such ownership chains, we calculate
the cash flow stake as the product of the ownership stakes along the chain.
15
24
5.7. Are the Lower Profitability and Larger Size Due to Empire Building?
A possible interpretation of the differences in size and profitability between new firms with
parent companies and matched stand-alone ones is that they are due to empire building.
Specifically, parent companies’ controlling owners might set up new firms with negative NPV
projects 16 which provide them with private benefits of control. However, in our sample,
ultimate corporate shareholders would also receive a large fraction of such projects’ negative
NPV – their median cash flow rights in new firms with parent companies are 63% – and thus it
is unlikely that they have large empire-building incentives. Moreover, Figure 2a shows that, while
the profitability of new firms with parent companies is lower than that of matched stand-alone
ones at the time of incorporation, it sharply increases as firms grow older and the gap in
profitability disappears. This is inconsistent with the view that new firms with parent companies
are negative NPV projects.
In Table 12, we further investigate this issue by comparing the productivity of labor and the
productivity of fixed assets of new firms with parent companies and that of stand-alone ones. If
the decision to set up new firms is driven by the empire-building motive, then new firms with
parent companies should be less productive than stand-alone ones. Panel A shows that new
firms with parent companies have 30.9% higher productivity of labor: They generate sales of
€189.07 thousand per employee while matched stand-alone new firms generate only €144.47
thousand per employee. This difference is highly statistically significant (t-statistic 17.89). In
addition, in spite of their much higher capital intensity, new firms with parent companies
generate the same sales per €1 invested in fixed assets as do stand-alone new firms. 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. In both cases, the results are qualitatively similar to those in Panel A.
Overall, the evidence in Table 12 is inconsistent with the empire-building argument.
6. Selection Bias in Regressions of Performance on Ownership Structure
We show that new firms with large investment requirements and/or low pledgeable cash
flows self select into ownership structures with parent companies. This finding is useful to
Note that, in our conceptual framework, projects with positive NPV but negative pledgeable NPV are set up as
new firms with parent companies. Therefore, from the perspective of the minority shareholders of the parent
company, setting up the new firm is indeed empire building. Nevertheless, our tests are aimed to rule out empire
building from the first best perspective, namely, that parent companies undertake negative NPV projects.
16
25
understand how ownership by parent companies affects a firm’s performance, a question that
has received especial attention in the context of business groups. In his survey of this literature,
Khanna (2000) highlights that unobserved factors might cause both group affiliation and firm
performance, e.g., profitability might affect a firm’s decision to join a group (see also Masulis et
al. (2009)).
We now explore to what extent selection affects regressions of firm performance on an
indicator variable for whether the firm has a parent company and propose a method to mitigate
the problem. The main source of the problem is the omission from the regression of the
unobservable project characteristics at the time the firm is created, which simultaneously
determine both the firm’s ownership structure and its performance. Since projects with low
pledgeable cash flows self select into ownership structures with parent companies, the error
term in the regression is negatively correlated with having a parent company. This causes a
downward bias in the estimated effect of having a parent company on firm performance. Since
the bias is due to a one-off selection effect at the time new firms are set up, it can be reduced by
controlling for projects’ investment requirements and pledgeable cash flows in the regression.
To illustrate the approach, we run regressions of EBITDA/Total Assets on indicator
variables for whether the firm has a parent company and proxies for projects’ investment
requirements and pledgeable cash flows. To construct such proxies, we calculate the average
profitability and the average size of new firms (i.e., firms with age 1-3 years) in each country,
three-digit ISIC industry, and legal form cell. These averages, denoted Initial EBITDA/Total
Assets and Initial Total Assets, respectively, serve as proxies for the underlying projects’
investment requirements and plegeable cash flows of all firms in the same country, industry, and
legal form cell. The other firm-level controls include the logarithm of total assets, age since
incorporation, tangibility of assets, and financial leverage, a well as legal form, country, threedigit ISIC industry, and calendar year fixed effects. The standard errors are clustered by firm.
Table 13 reports the results of the performance regression using all firms in the European
manufacturing sector over the period 2001-2006, regardless of their age. The tests in columns
(1) and (2) use all firms with parent companies and stand-alone firms. The variable of interest is
Parent Company, which equals one if the firm has a parent company and zero otherwise. In
column (1), where we omit Initial EBITDA/Total Assets and Initial Total Assets, the coefficient of
Parent Company is -0.023. In column (2), we include these variables and the coefficient changes to
-0.012. The coefficients are statistically significant at the 1% level in both cases. The tests in
columns (3) and (4) use all firms whose parent companies are affiliated with business groups and
26
stand-alone firms. The variable of interest is Parent Affiliated with Groups, which equals one if the
firm has an affiliated parent company and zero otherwise. The coefficient of Parent Affiliated with
Groups changes from -0.026 to -0.006 when we include Initial EBITDA/Total Assets and Initial
Total Assets, and becomes statistically insignificant at the 5% level. The tests in columns (5) and
(6) use all firms whose parent companies are not affiliated with business groups and stand-alone
firms. Once again, the coefficient of the Parent Not Affiliated with Groups indicator significantly
decreases when the proxies for the projects’ characteristics are included in the regression. In
sum, controlling for projects’ initial characteristics has an economically significant impact on the
estimated effect of having a parent company on firm performance.
7. Additional Investigation
In this Section, we assess the robustness of our main tests, namely, those which compare
the size, profitability, capital intensity, and equity financing of new firms with parent companies
to that of matched stand-alone ones.
7.1. New Firms Incorporated in the UK and Outside the UK
In the UK, all limited-liability companies 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 with this requirement, Amadeus contains the entire population of UK
companies. There is less compliance with similar or weaker 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. Also, new UK firms are on average significantly smaller than those in other
countries, as even the smallest firms are covered.
To see to what extent our results are sensitive to an incomplete coverage of new firms, in
Table 14, we repeat our main tests for subsamples of new firms incorporated in the UK (Panel
A) and new firms incorporated outside the UK (Panel B). In both subsamples, we continue to
find statistically and economically significant evidence that new firms with parent companies are
larger, less profitable, more capital intensive, and have more equity in their capital structures
compared to matched stand-alone new firms. The differences between new firms with parent
companies and stand-alone ones are larger in the UK than they are in other countries, i.e., the
results are stronger when the coverage is better. Focusing on the size result, new firms with
parent companies are typically larger and thus usually well covered in most countries. In
contrast, while small stand-alone new firms are well covered in the UK, such firms are more
27
sparsely covered in the rest of the countries. Therefore, the average size of new stand-alone
firms is significantly smaller in the UK and hence the size gap between new firms with parent
companies and stand-alone ones is larger in the UK.
A direct comparison of the differences between 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.
7.2 Cooperation in Product Markets
Previous research on large publicly-traded firms shows that ownership links between firms
that operate in related industries can stimulate the creation of joint ventures or strategic alliances
and remove hold-up problems (Allen and Phillips (2000)). In our context, it may be that parent
companies finance larger and/or less profitable new firms because there is potential for
cooperation in product markets. However, in our sample of small private firms, the
organizational decision about how to set up a new firm is unlikely to be driven by productmarket considerations. Most firms are closely held, typically by a single ultimate controlling
owner. If the controlling owner of an existing firm wishes to set up a new firm, she retains
control over both firms regardless of whether she chooses to control the new firm directly or
indirectly through a pyramidal ownership link. As a result, she can achieve cooperation in
product markets between the two firms with both organizational structures. 17
In Table 15, we compare new firms with parent companies to stand-alone ones using four
subsamples: New firms in the manufacturing sector whose ultimate corporate shareholders
operate in the manufacturing (ISIC 15-37), trade (ISIC 50-52), finance (ISIC 65-67), and services
(ISIC 70-74) sectors, respectively. We identify each new firm’s ultimate corporate shareholder
using the approach described in Section 3.4 (recall that for a large fraction of the new firms in
our sample the ultimate corporate owner is simply its direct parent company). Synergies are
more likely to be present when both the new firm and the parent company operate in
In contrast, the publicly-traded U.S. firms studied by Allen and Phillips (2000) are typically widely held. In this
case, even if some investors hold shares of two firms with potential synergies, they lack sufficient control to
enforce cooperation in product markets.
17
28
manufacturing and less so when they operate in unrelated sectors. If synergies play a role, the
differences in size and profitability between new firms with parent companies and stand-alone
new firms should be more pronounced for new firms whose ultimate corporate shareholders
also operate in manufacturing. However, we find that the differences across the two types of
new firms exist and are similar in magnitude regardless of the ultimate corporate shareholder’s
industry affiliation. This confirms our argument that the organizational decisions about how to
set up new firms are not driven by the need to stimulate cooperation in product markets.
7.3. New Firms in Industries with High and Low Enterprise Death Rates
In Section 5.3 we compare the age profile of the profitability of firms with parent
companies to that of stand-alone firms. Since we only observe firms conditional on their
survival, we now explore whether survivorship biases our inferences. The interpretation of our
results could be affected if new firms with parent companies and stand-alone new firms have
systematically different death rates. For example, it is possible 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 average profitability of
such firms is higher than the average profitability of new firms with parent companies, even if
the two types of firms undertake the same projects.
To examine whether survivorship affects our results, in Table 16, we summarize the age
profiles of key firm characteristics for firms with parent companies and stand-alone ones using
subsamples of 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 number of enterprise deaths
in the reference period divided by the number of enterprises active in the reference period. 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 of size,
profitability, capital intensity, and equity financing are qualitatively similar in both subsamples
and consistent with those in the full-sample. In sum, our results are robust to exaggerating as
well as to minimizing survivorship.
8. 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 both business groups
29
and unaffiliated 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, mostly startups, which spans a wide cross section of European countries. Imperfections in
the capital markets which finance new firms are especially severe and thus are likely to be an
important determinant of the organizational decisions underlying their creation. Therefore, our
setting is well suited to test the theory.
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. This evidence provides strong support for the theory and further shows 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 (2009)). This suggests that, in Europe, corporate venturing plays a role in the
financing of new firms similar to that of venture capital in the U.S.
Another key implication of our results is that, at the time new firms are set up, they self
select into ownership structures based on their ability to raise enough external financing. We
show that this selection causes a large bias in regressions of firm performance on ownership by
corporations. We construct proxies for the omitted variables that drive both the performance
and ownership structure decisions of new firms at the time they are incorporated, and show that
including them in the regression significantly reduces the bias.
Last, researchers and policymakers worry that pyramidal business groups may exercise
market power or distort the allocation of resources and thus may hinder innovation and
economic growth (e.g., Morck et al. (2005) and 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 viable 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.
30
References
Aganin, A., Volpin, P., 2005. History of corporate ownership in Italy. In Randall Morck, ed.: The
history of corporate governance around the world: Family business groups to professional managers (University
of Chicago Press, Chicago, IL).
Allen, J. W., Phillips, G. M., 2000. Corporate equity ownership, strategic alliances, and product
market relationships. Journal of Finance 55, 2791-2815.
Almeida, H., Park, S. Y., Subrahmanyam, M. G., Wolfenzon, D., 2010. The structure and
formation of business groups: Evidence from Korean Chaebols. Journal of Financial Economics,
forthcoming.
Almeida, H., Wolfenzon, D., 2006a. A theory of pyramidal ownership and family business
groups. Journal of Finance 61, 2637–2680.
Almeida, H., Wolfenzon, D., 2006b. Should business groups be dismantled? The equilibrium
costs of efficient internal capital markets. Journal of Financial Economics 79, 99–144.
Angrist J., 1998. Estimating the labor market impact of voluntary military service using social
security data on military applicants. Econometrica 66, 249–288.
Arellano, C., Bai, Y., Zhang, J., 2009. Firm dynamics and financial development. NBER
Working Paper No. 15193.
Bae, K-H. H., Kang, J-K., Kim, J-M., 2002. Tunneling or value added? Evidence from mergers
by Korean business groups. Journal of Finance 57, 2695-2740.
Baek, J-S., Kang, J-K., Lee, I., 2006. Business groups and tunneling: Evidence from private
securities offerings by Korean chaebols. Journal of Finance 61, 2415-2449.
Baek, J-S., Kang, J-K., Park, K. S., 2004. Corporate governance and firm value: Evidence from
the Korean financial crisis. Journal of Financial Economics 71, 265-313.
Belenzon, S., Berkovitz, T., 2008. Business group affiliation, financial development and market
structure: Evidence from Europe. Unpublished working paper.
Berger, A., Udell, G., 1995. Relationship lending and lines of credit in small firm finance. Journal
of Business 68, 351–381.
Berger, A., Udell, G., 1998. The economics of small business finance: The roles of private equity
and debt markets in the financial growth cycle. Journal of Banking and Finance 22, 613–673.
Berkowitz, J., White, M., 2004. Bankruptcy and small firms’ access to credit. Rand Journal of
Economics 35, 69–84.
Bertrand, M., Mehta, P., Mullainathan, S., 2002. Ferreting out tunneling: An application to
Indian business groups. Quarterly Journal of Economics 117, 121-148.
Claessens, S., Djankov, S., Fan, J. P. H., Lang, L. H. P., 2002. Disentangling the incentive and
entrenchment effects of large shareholdings. Journal of Finance 57, 2741-2771.
Claessens, S., Djankov, S., Lang, L. H. P., 2000. The separation of ownership and control in
East Asian corporations. Journal of Financial Economics 58, 81–112.
31
Claessens, S., Fan, J. P. H., Lang, L. H. P., 2006. The benefits of group affiliation: Evidence
from East Asia. Emerging Markets Review 7, 1-26.
Cole, R., 1998. The importance of relationships to the availability of credit. Journal of Banking and
Finance 22, 959–977.
Faccio, M., Lang, L. H. P., 2002. The ultimate ownership of western European corporations.
Journal of Financial Economics 65, 365-395.
Ferris, P. S., Kim, A. K., Kitsabunnarat, P., 2003. The cost (and benefits?) of diversified business
groups: The case of Korean chaebols. Journal of Banking and Finance 27, 251-273.
Friedman, E., Johnson, S., Minton, T., 2003. Propping and Tunneling. Journal of Comparative
Economics 31, 732–750.
Gilbert, R. J., 1989. Mobility barriers and the value of incumbency, R. L. Schmalensee and R. D.
Willig (Eds.), Handbook of Industrial Organization Volume 1, Chapter 8, Elsevier, North-Holland.
Gompers, P., 1995. Optimal investment, monitoring, and the staging of venture capital. Journal of
Finance 50, 1461–1489.
Gopalan, R., Nanda, V., Seru, A., 2007. Affiliated firms and financial support: Evidence from
Indian business groups. Journal of Financial Economics 86, 759–795.
Hall, B. H., Lerner, J., 2009. The financing of R&D and innovation. Hall, B. H. and N.
Rosenberg (Eds.), Handbook of the Economics of Innovation, Elsevier-North Holland,
Forthcoming.
Haltiwanger, J. C., Lane, J. I., Spletzer, J. R., 1999. Productivity differences across employers:
The roles of employer size, age, and human capital. American Economic Review 89, 94-98.
Harhoff, D., Körting, T., 1998. Lending relationships in Germany– Empirical evidence from
survey data. Journal of Banking and Finance 22, 1317–1353.
Hellerstein, J. K., Neumark, D., Troske, K. R., 1999. Wages, productivity, and worker
characteristics. Journal of Labor Economics 17, 409-446.
Hellmann, T., Puri, M., 2000. The interaction between product market and financing strategy:
the role of venture capital. Review of Financial Studies 13, 959–984.
Hellmann, T., Puri, M., 2002. Venture capital and the professionalization of start-up firms:
Empirical evidence. Journal of Finance 57, 169–197.
Joh, S. W., 2003. Corporate governance and profitability: Evidence from Korea before the
economic crisis. Journal of Financial Economics 68, 287-322.
Kaplan, S. N., Stromberg, P., 2003. Financial contracting theory meets the real world: an
empirical analysis of venture capital contracts. The Review of Economic Studies 70, 281-315.
Khanna, T., 2000. Business groups and social welfare in emerging markets: Existing evidence
and unanswered questions. European Economic Review 44, 748–761.
Khanna, T., Palepu, K., 1999. The right way to restructure business groups. Harvard Business
Review 7, 125–134.
32
Khanna, T., Palepu, K., 2000. Is group affiliation profitable in emerging markets? An analysis of
diversified Indian business groups. Journal of Finance 55, 867–893.
Khanna, T., Rivkin, J. W., 2001. Estimating the performance effects of business groups in
emerging markets. Strategic Management Journal 22, 45–74.
Khanna, T., Yafeh, Y., 2005. Business groups and risk sharing around the world. Journal of
Business 78, 302–338.
Khanna, T., Yafeh, Y., 2007. Business groups in emerging markets: Paragons or Parasites?
Journal of Economic Literature XLV, 331–372.
Klapper, L., Laeven, L., Rajan, R. G., 2006. Entry regulation as a barrier to entrepreneurship.
Journal of Financial Economics 82, 591–629.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 1999. Corporate ownership around the world.
Journal of Finance 54, 471–518.
Lerner, J., 1995. Venture capitalists and the oversight of private firms. Journal of Finance 50, 301–
318.
Leuven, E., Sianesi, B., 2003. PSMATCH2: Stata module to perform full Mahalanobis and
propensity score matching, common support graphing, and covariate imbalance testing.
http://ideas.repec.org/c/boc/bocode/s432001.html. Version 3.1.5 2may2009.
Masulis, R. W., Pham, P., Zein, J., 2009. Family business groups around the world: Costs and
benefits of pyramids. ECGI - Finance Working Paper No. 240/2009.
Morck, R., Nakamura, N., 1999. Banks and corporate control in Japan. Journal of Finance 54, 319–
339.
Morck, R., Stangeland, D., Yeung, B., 2000. Inherited wealth, corporate control, and economic
growth: The Canadian disease. In Concentrated Corporate Ownership. Randall Morck, ed.
Chicago: University of Chicago Press, 319-369.
Morck, R., Wolfenzon, D., Yeung, B., 2005. Corporate governance, economic entrenchment,
and growth. Journal of Economic Literature XLIII (September), 655–720.
Petersen, M. A., Rajan, R. G., 1994. The benefits of lending relationships: Evidence from small
business data. Journal of Finance 49, 3–37.
Rubin, D. B., 1980. Bias reduction using Mahalanobis-metric matching. Biometrics 36, 293–298.
Volpin, P. F., 2002. Governance with poor investor protection: Evidence from top executive
turnover in Italy. Journal of Financial Economics 64, 61-90.
33
Table 1
Summary Statistics of New Firms in 2001-2006
The table reports summary statistics of the characteristics of new firms (firms with age 1-3 years since incorporation) in the European
manufacturing sector for the period 2001-2006. Total Assets and Fixed Assets are measured at book values (in millions 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. Fixed Assets/Employment , Wages/Employment , and Sales/Employment are
measured in thousands of Euro per employee. Short-Term Debt/Total Assets is debt with a maturity of up to one year scaled by total assets.
Long-Term Debt/Total Assets is debt with a maturity of more than one year scaled by total assets. The Fraction of Long-Term Debt is the fraction
of total debt with a maturity of more than one year. Sales/Fixed Assets is measured in Euro per €1 invested in fixed assets. N is the number
of new firm-year observations for each variable.
Unit
Mean
S.D.
Pctile 10
Median
Pctile 90
N
7.16
3.49
0.02
0.00
0.22
0.05
3.15
1.17
82,926
75,363
%
%
Profitability
11.05
17.26
4.37
19.53
-8.33
-17.89
10.64
4.87
32.30
26.58
39,356
45,372
EUR th.
EUR th.
Technology
38.37
60.52
33.16
16.79
2.33
13.00
15.61
31.29
99.39
55.35
34,087
28,737
%
%
%
Debt Maturity
52.00
39.83
17.21
24.77
27.26
33.27
5.67
0.00
0.00
46.02
3.82
8.62
98.88
54.22
84.51
65,452
44,181
43,546
%
Equity
10.02
18.42
0.00
1.99
29.97
82,260
EUR th.
EUR
Productivity
158.75
149.74
20.81
37.09
41.01
1.30
110.89
7.54
331.34
52.60
29,928
41,074
Size
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Fixed Assets/Employment
Wages/Employment
Short-Term Debt/Total Assets
Long-Term Debt/Total Assets
Fraction of Long-Term Debt
Equity/Total Assets
Sales/Employment
Sales/Fixed Assets
EUR mil.
EUR mil.
1.93
0.83
Table 2
Ownership Structure of New Firms by Year
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 for 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. New firms affiliated with groups are
a subset of new firms with parent companies in which the parent company is part of a business group. A
business group has 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. New firms not affiliated with groups are a subset of new
firms with parent companies in which the parent company is not part of a business group. Stand-alone
new firms are new firms owned only by individuals.
Year
All
New Firms
2001
2002
2003
2004
2005
2006
4,695
8,594
7,815
14,049
24,973
22,800
Total
82,926
2001
2002
2003
2004
2005
2006
Total
Stand-Alone
New Firms
New Firms
with Parent
Companies
Panel A: Number of New Firms
56.0%
44.0%
53.4%
46.6%
54.9%
45.1%
72.0%
28.0%
79.2%
20.8%
77.1%
22.9%
New Firms
Affiliated
with Groups
New Firms
Not Affiliated
with Groups
10.8%
7.3%
6.5%
3.4%
2.9%
2.9%
33.2%
39.3%
38.6%
24.6%
17.9%
20.0%
4.2%
24.7%
Panel B: Total Assets of New Firms (EUR million)
21,589
10.9%
89.1%
36.2%
28,501
11.1%
88.9%
30.1%
22,633
14.4%
85.6%
27.2%
22,477
20.4%
79.6%
23.3%
32,986
23.5%
76.5%
29.4%
32,210
24.3%
75.7%
27.3%
53.0%
58.7%
58.4%
56.3%
47.1%
48.4%
160,396
71.1%
18.0%
28.9%
82.0%
28.9%
53.1%
Table 3
Control Stakes of Ultimate Corporate Shareholders in New Firms in 2006
The table provides information on the control stakes of ultimate corporate shareholders in new firms
(firms with age 1-3 years since incorporation) in the European manufacturing sector in 2006. Panel A
reports basic summary statistics and Panel B reports the frequency distribution over various ranges of
control stakes. The ultimate corporate shareholder is the corporation at the top of the ownership
pyramid, which in turn is either controlled by individuals or is widely held. We sum the control stakes
over all ownership chains that link (directly or indirectly) the ultimate corporate shareholder and the new
firm. For each of such ownership chains, we calculate the control stake as the minimum ownership stake
in the chain. New firms with parent companies are new firms with at least one incorporated shareholder.
New firms affiliated with groups are a subset of new firms with parent companies in which the parent
company is part of a business group. A business group has 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. New
firms not affiliated with groups are a subset of new firms with parent companies in which the parent
company is not part of a business group.
New Firms
with Parent
Companies
Number of New Firms
Mean
S.D.
Pctile 10
Median
Pctile 90
0 < Control Stake < 33
33 ≤ Control Stake < 50
Control Stake = 50
50 < Control Stake < 100
Control Stake = 100
New Firms
Affiliated
with Groups
Panel A: Summary Statistics
5,227
660
65.0%
33.5%
16.0%
66.0%
100.0%
New Firms
Not Affiliated
with Groups
4,567
58.0%
30.8%
17.0%
50.0%
100.0%
66.0%
33.7%
16.0%
70.0%
100.0%
Panel B: Frequency Distribution
20.6%
25.3%
10.8%
17.9%
9.8%
5.3%
33.2%
35.8%
25.6%
15.8%
19.9%
9.8%
10.4%
32.9%
27.0%
Table 4
Sample Composition of New Firms in 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 country of incorporation (Panel A), two-digit ISIC industry
affiliation (Panel B), and legal form of incorporation (Panel C). 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 median Total Assets of new firms, and the median
EBITDA/Total Assets of new firms, respectively. 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. New firms
incorporated as „Public‟ Limited companies are private limited-liability companies that are allowed to 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.
Austria
Bulgaria
Czech Republic
Denmark
Estonia
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Norway
Poland
Portugal
Russia
Spain
UK
Total
Total Assets
of New Firms
Number
of New Firms
Fraction of
New Firms
with Parent
Companies
EUR million
#
%
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
32,210
Median
Total Assets
of New Firms
Median
EBITDA/
Total Assets
of New Firms
EUR million
%
Panel A: By Country
771
32.9
49
22.4
35
8.6
1,186
64.2
66
37.9
1,096
40.2
2,616
28.7
344
9.0
14
14.3
535
8.2
339
97.3
10
40.0
82
36.6
1,432
51.4
93
37.6
181
26.5
16
25.0
1,122
38.6
12,813
10.0
0.68
0.32
0.15
0.33
0.20
0.33
0.43
1.57
0.59
0.14
4.42
1.66
0.88
0.25
1.58
0.32
1.28
0.43
0.09
10.8
14.1
25.0
13.8
15.9
12.2
12.8
8.2
9.0
22,800
0.17
11.3
22.9
6.9
12.3
13.2
9.6
7.9
14.9
Table 4 (cont’d)
Sample Composition of New Firms in 2006
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
„Public‟ Limited
„Private‟ Limited
Total
Total Assets
of New Firms
Number
of New Firms
Fraction of
New Firms
with Parent
Companies
Median
Total Assets
of New Firms
Median
EBITDA/
Total Assets
of New Firms
EUR million
#
%
EUR million
%
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
0.25
0.17
0.12
0.15
0.14
0.25
0.09
1.05
0.28
0.29
0.21
0.19
0.19
0.31
0.18
0.25
0.18
0.21
0.13
0.12
8.8
9.5
8.1
11.3
11.0
8.9
12.2
5.2
7.5
12.9
10.3
11.5
14.8
12.0
12.0
10.4
10.7
9.7
9.8
9.9
22.9
0.17
11.3
65.0
20.9
1.75
0.16
8.5
11.9
22.9
0.17
11.3
Panel B: By Industry
3,545
1,728
748
631
389
517
158
145
990
1,396
672
255
2,037
3,459
280
31
2,920
600
1,438
815
1,657
999
1,285
451
4,364
4,492
4,545
2,027
1,464
758
984
343
744
741
1,299
390
1,025
567
1,665
2,455
32,210
22,800
Panel C: By Legal Form of Incorporation
7,554
1,026
24,656
21,774
32,210
22,800
Table 5
Size and Profitability 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 ) and 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 the country of incorporation, industry affiliation at the ISIC
three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar year of observation. 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. New firms affiliated with groups are a subset of new firms with parent companies in which the parent
company is part of a business group. A business group has 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. New
firms not affiliated with groups are a subset of new firms with parent companies in which the parent company is not part of a business
group. Stand-alone new firms are new firms owned only by individuals. Total Assets and Fixed Assets are measured in millions of Euro.
In all panels, the last two columns report the number of new firms on the common support.
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Parent
# Parent
Stand-Alone Difference
t-stat
Companies
Companies
4.11
0.67
3.44
43.12
16,968
1.84
0.27
1.57
36.40
15,020
8.7%
13.1%
-4.5%
-15.95
10,326
1.8%
5.7%
-3.9%
-13.13
12,318
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
# Affiliated
Stand-Alone Difference
t-stat
with Groups
with Groups
Total Assets
11.72
1.10
10.62
27.73
2,074
Fixed Assets
5.31
0.48
4.83
23.98
1,879
EBITDA/Total Assets
6.9%
12.8%
-5.9%
-9.95
1,530
EBIT/Total Assets
0.7%
5.8%
-5.1%
-8.30
1,818
# Stand-Alone
58,984
53,675
22,395
25,816
# Stand-Alone
58,912
53,607
22,353
25,771
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Not Affiliated
# Not Affiliated
Stand-Alone Difference
t-stat
# Stand-Alone
with Groups
with Groups
Total Assets
3.08
0.63
2.45
35.14
14,864
58,984
Fixed Assets
1.35
0.25
1.10
28.82
13,080
53,675
EBITDA/Total Assets
8.9%
13.2%
-4.2%
-14.52
8,799
22,395
EBIT/Total Assets
2.0%
5.7%
-3.7%
-12.00
10,495
25,816
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Affiliated
Not Affiliated
# Affiliated
# Not Affiliated
Difference
t-stat
with Groups
with Groups
with Groups
with Groups
Total Assets
11.51
5.24
6.27
16.39
2,458
20,419
Fixed Assets
5.27
2.16
3.11
14.92
2,235
18,401
EBITDA/Total Assets
6.6%
7.8%
-1.2%
-2.29
1,924
13,867
EBIT/Total Assets
0.5%
1.3%
-0.8%
-1.44
2,280
16,014
Table 6
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 the country of incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited
company), age, and calendar year of observation. 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. New firms affiliated with groups are a subset of new firms with parent
companies in which the parent company is part of a business group. A business group has 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. New firms not affiliated with groups are a subset of new firms with parent companies in which the parent company is not part of a
business group. Stand-alone new firms are new firms owned only by individuals. Fixed Assets/Employment and Wages/Employment are
measured in thousands of Euro per employee. In all panels, the last two columns report the number of new firms on the common support.
Fixed Assets/Employment
Wages/Employment
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Parent
# Parent
Stand-Alone Difference
t-stat
Companies
Companies
44.96
29.78
15.17
16.23
8,897
37.22
31.48
5.74
18.73
8,009
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
# Affiliated
Stand-Alone Difference
t-stat
with Groups
with Groups
Fixed Assets/Employment
67.21
33.27
33.94
12.84
1,263
Wages/Employment
40.75
28.24
12.51
18.65
1,186
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Not Affiliated
# Not Affiliated
Stand-Alone Difference
t-stat
with Groups
with Groups
Fixed Assets/Employment
41.30
29.23
12.07
12.73
7,615
Wages/Employment
36.59
32.05
4.54
14.43
6,817
# Stand-Alone
18,976
14,468
# Stand-Alone
18,906
14,447
# Stand-Alone
18,976
14,468
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Affiliated
Not Affiliated
# Affiliated
# Not Affiliated
Difference
t-stat
with Groups
with Groups
with Groups
with Groups
Fixed Assets/Employment
65.65
52.46
13.19
4.87
1,612
12,390
Wages/Employment
41.90
36.82
5.09
8.76
1,625
11,566
Table 7
Debt Maturity of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the debt maturity structure 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 the country of
incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar year of
observation. 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. New firms affiliated with groups are a subset of new firms with parent companies in which the parent company is part of a business
group. A business group has 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. New firms not affiliated with groups are a subset of new firms
with parent companies in which the parent company is not part of a business group. Stand-alone new firms are new firms owned only by
individuals. Short-Term Debt/Total Assets is debt with a maturity of up to one year scaled by total assets. Long-Term Debt/Total Assets is debt with a
maturity of more than one year scaled by total assets. The Fraction of Long-Term Debt is the fraction of total debt with a maturity of more than one
year. In all panels, 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
Parent
# Parent
Stand-Alone Difference
t-stat
Companies
Companies
Short-Term Debt/Total Assets
42.4%
51.3%
-8.9%
-16.38
10,879
Long-Term Debt/Total Assets
20.4%
17.8%
2.5%
6.24
8,524
Fraction of Long-Term Debt
32.1%
26.8%
5.4%
10.31
8,359
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
# Affiliated
Stand-Alone Difference
t-stat
with Groups
with Groups
Short-Term Debt/Total Assets
31.7%
50.3%
-18.5%
-15.73
1,621
Long-Term Debt/Total Assets
24.2%
20.6%
3.6%
3.66
1,383
Fraction of Long-Term Debt
37.2%
28.4%
8.8%
7.07
1,320
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Not Affiliated
# Not Affiliated
Stand-Alone Difference
t-stat
with Groups
with Groups
Short-Term Debt/Total Assets
44.3%
51.5%
-7.2%
-12.83
9,229
Long-Term Debt/Total Assets
19.6%
17.4%
2.2%
5.43
7,141
Fraction of Long-Term Debt
31.2%
26.5%
4.8%
8.87
7,029
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Affiliated
Not Affiliated
# Affiliated
Difference
t-stat
with Groups
with Groups
with Groups
Short-Term Debt/Total Assets
30.7%
41.3%
-10.5%
-9.39
2,014
Long-Term Debt/Total Assets
23.8%
21.7%
2.1%
2.22
1,739
Fraction of Long-Term Debt
37.9%
33.8%
4.1%
3.30
1,661
# Stand-Alone
49,166
30,378
30,202
# Stand-Alone
49,099
30,331
30,165
# Stand-Alone
49,164
30,374
30,198
# Not Affiliated
with Groups
13,184
11,007
10,694
Table 8
Equity of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the 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 the country of incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited
company), age, and calendar year of observation. 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. New firms affiliated with groups are a
subset of new firms with parent companies in which the parent company is part of a business group. A business group has 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. New firms not affiliated with groups are a subset of new firms with
parent companies in which the parent company is not part of a business group. Stand-alone new firms are new firms owned only by
individuals. In all panels, the last two columns report the number of new firms on the common support.
Equity/Total Assets
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Parent
# Parent
Stand-Alone Difference
t-stat
Companies
Companies
15.1%
12.5%
2.6%
11.79
16,577
# Stand-Alone
58,411
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
# Affiliated
Stand-Alone Difference
t-stat
# Stand-Alone
with Groups
with Groups
Equity/Total Assets
18.2%
12.3%
5.9%
9.87
2,182
58,338
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Not Affiliated
# Not Affiliated
Stand-Alone Difference
t-stat
# Stand-Alone
with Groups
with Groups
Equity/Total Assets
14.6%
12.5%
2.1%
9.46
14,321
58,411
Panel D: New Firms with Parent Companies Affiliated with Groups vs. Not Affiliated Parent Companies
Affiliated
Not Affiliated
# Affiliated
# Not Affiliated
Difference
t-stat
with Groups
with Groups
with Groups
with Groups
Equity/Total Assets
18.2%
15.8%
2.4%
3.75
2,631
19,977
Table 9
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 Total Assets , Fixed Assets , and Equity/Total Assets of new firms whose
parent companies have retained earnings 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 the country of incorporation, industry
affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar year of observation.
Panel A makes the comparison using all new firms with parent companies; Panel B makes the comparison using only new firms whose
parent companies are affiliated with business groups; Panel C makes the comparison using only new firms whose parent companies are not
affiliated with business groups. New firms with parent companies are new firms with at least one incorporated shareholder. New firms
affiliated with groups are a subset of new firms with parent companies in which the parent company is part of a business group. A business
group has 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. New firms not affiliated with groups are a subset of new
firms with parent companies in which the parent company is not part of a business group. Total Assets and Fixed Assets are measured in
millions of Euro. In all panels, the last two columns report the number of new firms with parent companies on the common support.
High Retained
Earnings
Low Retained
Difference
Earnings
t-stat
# High Retained
Earnings
Panel A: New Firms with Parent Companies
2.60
3.08
13.98
1.21
1.39
11.45
16.0%
0.9%
1.57
Total Assets
Fixed Assets
Equity/Total Assets
5.68
2.60
16.9%
Total Assets
Fixed Assets
Equity/Total Assets
Panel B: New Firms with Parent Companies Affiliated with Groups
13.96
8.93
5.03
3.42
6.59
4.40
2.19
2.63
20.3%
19.9%
0.4%
0.20
Total Assets
Fixed Assets
Equity/Total Assets
# Low Retained
Earnings
4,166
3,605
4,036
8,115
7,354
8,068
356
308
398
1,425
1,331
1,552
Panel C: New Firms with Parent Companies Not Affiliated with Groups
3.50
1.53
1.97
11.22
3,348
1.54
0.69
0.86
8.78
2,887
15.1%
14.8%
0.3%
0.57
3,185
6,674
6,003
6,509
Table 10
Characteristics of Startups with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the characteristics 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 which are startups with parent
companies or stand-alone firms. Matching is exact on the country of incorporation, industry affiliation at the ISIC three-digit level, legal form
(„Public‟ Limited or „Private‟ Limited company), age, and calendar year of observation. Panel A reports the differences in size (Total Assets or
Fixed Assets ) and profitability (EBITDA/Total Assets or EBIT/Total Assets ); Panel B reports the differences in capital intensity (Fixed
Assets/Employment ) and average wage paid (Wages/Employment ); Panel C reports the differences in debt maturity (Short-Term Debt/Total Assets ,
Long-Term Debt/Total Assets , Fraction of Long-Term Debt ); Panel D reports the differences in equity financing (Equity/Total Assets ). A new firm with
a parent company is a startup if none of the incorporated shareholders 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 and Fixed Assets are measured in millions of Euro. Fixed Assets/Employment and Wages/Employment are measured in
thousands of Euro per employee. In all panels, the last two columns report the number of new firms on the common support.
Startups
with Parent
Companies
Stand-Alone
Difference
Panel A: Size and Profitability
0.58
2.09
0.23
0.90
13.3%
-3.9%
5.9%
-3.4%
t-stat
# Startups
with Parent
Companies
# Stand-Alone
30.27
24.96
-12.84
-10.72
13,250
11,636
7,790
9,280
58,762
53,463
22,245
25,653
Total Assets
Fixed Assets
EBITDA/Total Assets
EBIT/Total Assets
2.67
1.13
9.4%
2.5%
Fixed Assets/Employment
Wages/Employment
39.50
35.90
Panel B: Technology
28.78
10.72
32.06
3.83
11.10
11.97
6,764
6,098
18,848
14,359
46.0%
19.1%
30.2%
Panel C: Debt Maturity
51.8%
-5.9%
17.3%
1.8%
26.2%
4.0%
-10.17
4.15
7.33
8,133
6,316
6,220
49,001
30,223
30,056
14.3%
Panel D: Equity
12.4%
1.9%
8.13
12,824
58,200
Short-Term Debt/Total Assets
Long-Term Debt/Total Assets
Fraction of Long-Term Debt
Equity/Total Assets
Table 11
Profitability of New Firms with Parent Companies: Incentives for Cash Flow Diversion
The table uses the sample of new firms (firms with age 1-3) with parent companies in the European manufacturing sector in 2001-2006. We
report the results of matching-based comparisons of the profitability (EBITDA/Total Assets and EBIT/Total Assets ) of new firms in which
the ultimate corporate shareholders have high and low incentives to divert cash flows. Matching is exact on the country of incorporation,
industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar year of
observation. In Panel A, we split the sample into new firms whose ultimate corporate shareholders have cash flow rights below and above the
sample median. In Panel B, we focus on new firms whose ultimate corporate shareholders have a wedge between control and cash flow
rights (defined as the ratio of control and cash flow rigths) above one, and split the sample into those with a wedge above and below the
sample median. Firms with parent companies are firms with at least one incorporated shareholder. The ultimate corporate shareholder is the
corporation at the top of the ownership pyramid, which in turn is either controlled by individuals or is widely held. To compute the control
rights, we sum the control stakes over all ownership chains that link (directly or indirectly) the ultimate corporate shareholder and the new
firm. For each of such ownership chains, we calculate the control stake as the minimum ownership stake in the chain. To compute the cash
flow rights, we sum the cash flow stakes across all ownership chains that link (directly or indirectly) the ultimate corporate shareholder and
the new firm. For each of such ownership chains, we calculate the cash flow stake as the product of the ownership stakes along the chain. In
both panels, the last two columns report the number of new firms with parent companies on the common support.
EBITDA/Total Assets
EBIT/Total Assets
Panel A: Cash Flow Rights of the Ultimate Corporate Shareholders in New Firms
Cash Flow
Cash Flow
# Cash Flow
Rights
Rights
Difference
t-stat
Rights
Below Median Above Median
Below Median
8.3%
8.3%
0.0%
-0.04
4,682
1.4%
2.0%
-0.6%
-1.42
5,591
# Cash Flow
Rights
Above Median
8,481
9,779
Panel B: Wedge between Control and Cash Flow Rights of the Ultimate Corporate Shareholders in New Firms
Wedge
Wedge
# Wedge
# Wedge
Difference
t-stat
Above Median Below Median
Above Median
Below Median
EBITDA/Total Assets
7.0%
5.6%
1.5%
1.07
362
1,638
EBIT/Total Assets
1.1%
-0.7%
1.8%
1.30
435
1,884
Table 12
Productivity of New Firms with Parent Companies and Stand-Alone New Firms
The table reports the results of matching-based comparisons of the productivity 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 the
country of incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company),
age, and calendar year of observation. 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. New firms with parent companies are
new firms with at least one incorporated shareholder. New firms affiliated with groups are a subset of new firms with parent
companies in which the parent company is part of a business group. A business group has 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. New firms not affiliated with groups are a subset of new firms with parent companies in which the
parent company is not part of a business group. Stand-alone new firms are new firms owned only by individuals. Sales/Employment is
measured in thousands of Euro per employee. Sales/Fixed Assets is measured in Euro per €1 of fixed assets. In all panels, the last two
columns report the number of new firms on the common support.
Sales/Employment
Sales/Fixed Assets
Panel A: New Firms with Parent Companies vs. Stand-Alone New Firms
Parent
# Parent
Stand-Alone Difference
t-stat
Companies
Companies
189.07
144.47
44.61
17.89
12,233
21.69
21.67
0.02
0.03
9,589
# Stand-Alone
17,055
25,758
Panel B: New Firms with Parent Companies Affiliated with Groups vs. Stand-Alone New Firms
Affiliated
# Affiliated
Stand-Alone Difference
t-stat
# Stand-Alone
with Groups
with Groups
Sales/Employment
221.03
143.99
77.04
12.78
1,206
17,025
Sales/Fixed Assets
17.67
19.54
-1.87
-1.49
1,515
25,713
Panel C: New Firms with Parent Companies Not Affiliated with Groups vs. Stand-Alone New Firms
Sales/Employment
Sales/Fixed Assets
Not Affiliated
with Groups
Stand-Alone
Difference
t-stat
171.86
22.46
138.86
21.96
33.00
0.50
12.87
0.81
# Not Affiliated
with Groups
6,176
8,065
# Stand-Alone
17,053
25,755
Table 13
Profitability and Ownership by Corporations
The table reports the results of OLS regressions of EBITDA/Total Assets on alternative corporate ownership dummies using all firms in the
European manufacturing sector during the period 2001-2006 regardless of age. In columns (1) and (2) the sample includes all firms with parent
companies and stand-alone firms; Parent Company equals 1 for firms with parent companies and zero for stand-alone firms. In columns (3) and (4)
the sample includes firms whose parent companies are affiliated with business groups and stand-alone firms; Parent Affiliated with Groups equals 1 for
firms with parent companies affiliated with business groups and zero for stand-alone firms. In columns (5) and (6) the sample includes firms whose
parent companies are not affiliated with business groups and stand-alone firms; Parent Not Affiliated with Groups equals 1 for firms with parent
companies who are not affiliated and zero for stand-alone firms. See Table 2 for more details on the definition of new firms with parent companies,
stand-alone new firms, and parent-company group affiliation. Initial EBITDA/Total Assets and Initial Total Assets are calculated as the average
EBITDA/Total Assets and the average Total Assets , respectively, of firms with age 1-3 in each country, three-digit ISIC industry, and legal form cell.
We then assign the values of Initial EBITDA/Total Assets and Initial Total Assets to all firms in the sample according to their country, industry, and
legal form. 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. Private Limited is equal to 1 for „Private‟ Limited firms and zero for „Public‟ Limited firms. All specifications
include country, 3-digit-ISIC industry, and year dummies. Robust standard errors (clustered at firm level) are reported in parentheses; *, **, and ***
denote significance at the 10%, 5%, and 1% level, respectively.
Parent Company
(1)
-0.023***
(0.001)
(2)
-0.012***
(0.001)
Parent Affiliated with Groups
(3)
(4)
-0.026***
(0.002)
-0.006*
(0.003)
Parent Not Affiliated with Groups
Initial EBITDA/Total Assets
0.113***
(0.009)
-0.006***
(0.001)
Log(Initial Total Assets)
Log(Total Assets)
Age
Tangibility
Leverage
„Private‟ Limited
Country FE
Industry FE
Year FE
N
2
R
(5)
(6)
-0.023***
(0.001)
-0.014***
(0.001)
0.118***
(0.010)
-0.004***
(0.001)
0.136***
(0.014)
-0.007***
(0.002)
-0.001***
(0.000)
-0.046***
(0.002)
0.022***
(0.002)
-0.102***
(0.001)
0.013***
(0.001)
-0.000
(0.000)
-0.046***
(0.002)
0.022***
(0.002)
-0.101***
(0.001)
0.008***
(0.001)
-0.000
(0.001)
-0.068***
(0.003)
0.033***
(0.002)
-0.097***
(0.002)
0.016***
(0.002)
0.000
(0.001)
-0.067***
(0.003)
0.032***
(0.002)
-0.096***
(0.002)
0.013***
(0.002)
-0.000
(0.000)
-0.059***
(0.002)
0.026***
(0.002)
-0.098***
(0.001)
0.015***
(0.001)
0.000
(0.000)
-0.058***
(0.002)
0.025***
(0.002)
-0.098***
(0.001)
0.011***
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
282,441
282,441
173,508
173,508
242,436
242,436
0.09
0.09
0.09
0.09
0.09
0.09
Table 14
UK and Non-UK New Firms
The table reports the results of matching-based comparisons of the Total Assets , EBITDA/Total Assets , Fixed Assets/Employment , and
Equity/Total Assets 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 the country of
incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar
year of observation. 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 countries except the UK. 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. Total Assets are measured in millions of Euro and
Fixed Assets/Employment is measured in thousands of Euro per employee. In both panels, the last two columns report the number of new
firms on the common support.
Parent
Companies
Stand-Alone
Difference
t-stat
# Parent
Companies
# Stand-Alone
Panel A: UK New Firms with Parent Companies vs. UK Stand-Alone New Firms
Total Assets
4.08
0.32
3.76
23.19
4,502
EBITDA/Total Assets
4.7%
14.5%
-9.9%
-8.46
1,075
Fixed Assets/Employment
50.31
19.85
30.46
7.61
493
Equity/Total Assets
8.8%
3.5%
5.2%
14.76
4,541
31,702
3,146
417
32,252
Panel B: Non-UK New Firms with Parent Companies vs. Non-UK Stand-Alone New Firms
Total Assets
4.15
0.82
3.34
35.95
12,626
EBITDA/Total Assets
9.1%
13.0%
-3.9%
-14.04
9,262
Fixed Assets/Employment
44.67
30.37
14.31
15.09
8,422
Equity/Total Assets
17.5%
15.8%
1.7%
5.85
12,132
27,275
19,187
18,555
26,152
Table 15
New Firms with Ultimate Corporate Shareholders from Different Industrial Sectors
The table reports the results of matching-based comparisons of the Total Assets , EBITDA/Total Assets , Fixed Assets/Employment , and
Equity/Total Assets of new firms with ultimate corporate shareholders from different industries 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 the country of
incorporation, industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, and calendar
year of observation. Panel A compares new firms whose ultimate corporate shareholder operates in the manufacturing sector (ISIC 15-37)
to matched stand-alone new firms; Panel B compares new firms whose ultimate corporate shareholder operates in the trade sector (ISIC 5052) to matched stand-alone new firms; Panel C compares new firms whose ultimate corporate shareholder operates in the finance sector
(ISIC 65-67) to matched stand-alone new firms; Panel D compares new firms whose ultimate corporate shareholder operates in the services
sector (ISIC 70-74) to matched stand-alone new firms. 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, which in turn is either controlled
by individuals or is widely held. Stand-alone new firms are new firms owned only by individuals. Total Assets are measured in millions of
Euro and Fixed Assets/Employment is measured in thousands of Euro per employee. In all panels, the last two columns report the number of
new firms on the common support.
Parent
Companies
Stand-Alone
Difference
t-stat
# Parent
Companies
# Stand-Alone
3,368
2,078
1,690
3,266
58,950
22,340
18,919
58,366
955
604
537
913
58,189
21,811
18,527
57,618
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Panel A: Ultimate Corporate Shareholders Operating in Manufacturing
3.38
0.73
2.64
18.68
8.0%
12.3%
-4.3%
-8.80
42.67
28.38
14.29
7.90
15.2%
12.1%
3.1%
7.23
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Panel B: Ultimate Corporate Shareholders Operating in Trade
2.65
0.68
1.97
7.46
7.7%
12.0%
-4.2%
-5.25
47.37
28.81
18.56
5.17
15.7%
13.4%
2.3%
3.10
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Panel C: Ultimate Corporate Shareholders Operating in Finance
3.09
0.67
2.41
10.87
12.2%
14.3%
-2.1%
-2.74
44.33
34.72
9.62
4.05
16.2%
16.2%
-0.1%
-0.10
1,620
1,257
1,097
1,579
58,647
22,115
18,664
58,078
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Panel D: Ultimate Corporate Shareholders Operating in Services
3.41
0.61
2.80
21.83
9.2%
13.6%
-4.4%
-10.21
39.31
29.20
10.11
7.18
15.3%
13.2%
2.1%
5.80
5,040
3,150
2,662
4,868
58,947
22,368
18,912
58,373
Table 16
Firms in Industries with High and Low Enterprise Death Rates
The table reports the results of matching-based comparisons of the Total Assets , EBITDA/Total Assets , Fixed Assets/Employment , and
Equity/Total Assets of firms with parent companies and stand-alone firms in each of the age categories 1-5, 6-10, 11-15, and 16-20. The sample
consists of all firms in the European manufacturing sector with ages 1-20 in 2001-2006. Matching is exact on the country of incorporation,
industry affiliation at the ISIC three-digit level, legal form („Public‟ Limited or „Private‟ Limited company), age, listed status, and calendar year of
observation. The comparison is made separately for industries with high enterprise death rates (Panel A) and low enterprise death rates (Panel
B). An industry‟s death rate is defined as the time-average of the number of enterprise deaths in the reference period divided by 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. Firms with parent companies are firms with at least one incorporated shareholder. Stand-alone firms
are firms owned only by individuals. Total Assets are measured in millions of Euro and Fixed Assets/Employment is measured in thousands of
Euro per employee. “a” denotes significance at the 1% level.
Parent
Companies
Stand-Alone
Difference
Parent
Companies
Stand-Alone
Difference
4.70
10.2%
47.36
17.6%
Age 6-10
1.18
11.8%
32.21
12.2%
3.51
-1.6% a
a
15.14
5.4% a
7.32
9.9%
51.25
15.1%
Age 16-20
2.06
10.2%
37.18
10.9%
5.26 a
-0.3%
14.08 a
a
4.2%
7.97
11.3%
37.40
15.4%
Age 6-10
1.21
13.5%
25.67
10.2%
6.76 a
-2.1% a
11.73 a
5.2% a
9.34
10.8%
36.33
13.5%
Age 16-20
2.22
11.9%
28.26
9.1%
7.12 a
-1.2% a
8.07 a
4.3% a
Panel A: Industries with High Enterprise Death Rates
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
3.32
8.8%
53.00
16.7%
Age 1-5
0.73
11.9%
32.19
12.9%
5.97
10.5%
45.63
16.5%
Age 11-15
1.59
11.6%
33.65
12.5%
a
2.59
-3.2% a
a
20.81
3.7% a
a
4.38
-1.1% a
11.98 a
a
4.0%
a
Panel B: Industries with Low Enterprise Death Rates
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
Total Assets
EBITDA/Total Assets
Fixed Assets/Employment
Equity/Total Assets
6.40
10.0%
41.46
14.7%
Age 1-5
0.83
14.2%
27.71
11.3%
8.55
11.3%
33.71
14.1%
Age 11-15
1.73
12.9%
25.68
10.3%
a
5.57
-4.3% a
13.75 a
3.3% a
a
6.81
-1.6% a
8.03 a
3.8% a
Size and Profitability of New Firms
New Firms with Parent Companies
Stand-Alone New Firms
7
5
4
3
2
Total Assets (EUR mil.)
6
1
-10%
-5%
0%
5%
10%
15%
EBITDA/Total Assets
20%
25%
0
30%
Figure 1a. For both new firms with parent companies and stand-alone new firms, the figure plots the average EBITDA/Total
Assets against the average Total Assets in each country, three-digit ISIC industry, and legal form („Public‟ Limited or „Private‟
Limited company) cell. The sample consists of new firms (firms with age 1-3) in the European manufacturing sector in 20012006 and is described in Tables 1 to 4.
Difference in Size and Profitability of New Firms
10
5
0
-5
-10
-20%
-15%
-10%
-5%
0%
5%
Difference in EBITDA/Total Assets
10%
15%
Difference in Total Assets (EUR mil.)
15
-15
20%
Figure 1b. The figure plots the differences in the average Total Assets and the average EBITDA/Total Assets between new
firms with parent companies and stand-alone new firms in each country, three-digit ISIC industry, and legal form („Public‟
Limited or „Private‟ Limited company) cell. The sample consists of new firms (firms with age 1-3) in the European
manufacturing sector in 2001-2006 and is described in Tables 1 to 4.
EBITDA/Total Assets by Age
Firms with Parent Companies
vs. Stand-Alone Firms
14%
Summary Statistics ofFirms
New Firms
2001-2006
withinParent
Companies Affiliated
13%
13%
12%
12%
11%
11%
10%
10%
9%
9%
8%
8%
7%
7%
6%
6%
5%
5%
1
2
3
4
5
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Stand-Alone
Parent Companies
Figure 2a
Summary Statistics Firms
of New Firms
2001-2006
with in
Parent
Companies Not
Affiliated
with Groups vs. Stand-Alone Firms
14%
1
12%
12%
11%
11%
10%
10%
9%
9%
8%
8%
7%
7%
6%
6%
5%
5%
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 2c
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 2b
with Groups vs. Not Affiliated with Groups
14%
13%
2
2
Summary Statistics of New
Firms
in 2001-2006
Firms
with
Parent Companies: Affiliated
13%
1
with Groups vs. Stand-Alone Firms
14%
1
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Parent Not Affiliated with Groups
Parent Affiliated with Groups
Figure 2d
Figure 2. The figure plots the results of matching-based comparisons of the EBITDA/Total Assets of firms with different ownership structures. The sample consists of all firms in the European
manufacturing sector with ages 1-20 in 2001-2006. Matching is done for each year of age from 1 to 20 separately and is exact on the country of incorporation, industry affiliation at ISIC three-digit
level, legal form („Public‟ Limited or „Private‟ Limited company), listed status, and calendar year of observation. Figure 2a compares firms with parent companies to matched stand-alone firms;
Figure 2b compares firms whose parent companies are affiliated with groups to matched stand-alone firms; Figure 2c compares firms whose parent companies are not affiliated with groups to
matched stand-alone firms; Figure 2d compares firms whose parent companies are affiliated with groups to matched firms whose parent companies are not affiliated with groups.