Financial Constraint, Private Benefits of Control and Pyramidal Structure

Under the assumption of rational investors, the paper constructs the decision model about the corporate controlling structure choice by the ultimate controlling shareholders. The model results show that the structure of corporate control is a state-dependent selection (depending on the specific parameters), and the more severe the company-s financial constraint, the more likely it will be controlled by the ultimate controlling shareholders with pyramidal structure. The other shareholders of the old corporate may be benefitted or suffer losses when the ultimate controlling shareholders control the new company with Horizontal structure, whereas they may be sure to be benefited when the ultimate controlling shareholders control the new company with pyramidal structure.