Pyramidal groups and external finance: An empirical investigation

In Italy an extremely large number of companies is organized as a pyramidal group. As compared to other control structures, pyramidal groups might offer minority shareholders less protection and hence discourage them from holding shares. We evaluate empirically the impact of some variables that proxy the degree of shareholder protection on non controlling equity finance and, in particular, the effect of the degree of group vertical integration. Ceteris paribus, vertical integration is associated with lower participation of outside minority shareholders. The paper argues that this finding is due to greater opportunities for the controlling shareholder to transfer resources across the subsidiaries, which reduces the incentives for potential outside equity finance.