Innovation in pyramidal ownership structures

We examine the association between a pyramidal ownership structure and the intensity of high-tech companies' investments in innovation. We find that companies in pyramidal business groups invest in innovation with greater intensity than similar companies that are not part of such an ownership structure. Furthermore, the intensity of investment in innovation is significantly higher the lower the firm is situated in the pyramid, where the ultimate owner has a smaller share of the equity. However, these findings are statistically significant only for biotechnology firms. It seems that for biotech companies, the pyramidal structure serves to transfer the immense investment risk inherent in them away from the ultimate owners further down the pyramid where they have a lower stake in profits and losses. In that sense, the inclusion of biotech firms further down the pyramid is, in effect, a particular kind of tunneling.