Ownership structure is understood as the relative and absolute involvement of distinct shareholders in company stockholdings and is expressed in terms of the stake (proportion and number) of controlled shares. It represents the concentration of ownership and control as well as the positions of different shareholder types. Existing studies on ownership structure, its dynamics and characteristics help illustrate the management style, the decision-making process and the strategic development paths taken by companies (Demsetz & Lehn 1985). Research reveals that shareholders have different interests and goals which determine their behaviour and investment strategies at the company level (Castañer & Kavadis 2013; Combs 2008; van Essen et al. 2015). Specifically, the existing literature in management and finance indicates that shareholder structure influences company growth and development, being a crucial determinant for the company’s operation horizon (Clarke 2014), its strategy (Castañer & Kavadis 2013; van Essen et al. 2015), investment and profit distribution (Shleifer & Vishny 1997), leadership (Combs 2008) and human resource practice (van Essen et al. 2012).

Comparative analysis reveals distinct types of ownership structure and patterns of corporate control which offer both favourable environments and structural limitations for company’s strategic development. For instance, the dispersed ownership that is a characteristic of large firms and Anglo-Saxon companies allows for risk diversification, profit sharing and flexible funds allocation. It also secures the raising of substantial capital for company growth and development. However, companies characterised by dispersed ownership are prone to experience principal-agent conflicts between executives and shareholders (Fama & Jensen 1983; Jensen & Meckling 1976; Shleifer & Vishny 1997). In addition, portfolio-oriented financial investors prefer the distribution of created value (in the form of stock repurchase and higher share prices or dividend payouts) to having numerous shareholders and may limit investment in research and development (R&D) and company-specific skills (Carlin & Mayer 2003). Concentrated ownership, as associated with family control and the involvement of corporate owners, is evident in continental Europe, Latin America and Asia (Morck 2005; 2009), but it also remains the prevalent feature of emerging markets (Le, Kroll & Walters 2010). The concentration of ownership results in (or is reinforced by) additional mechanisms of leveraging control. Thus, concentrated control is not only caused by a simple majority stake held by the dominant shareholder, but also strengthened by the adoption of dual class shares and pyramidal structures (Almeida & Wolfenzon 2006; Morck 2009; Zattoni 1999). On the level of business management, concentration of ownership and control is associated with larger private benefits, a larger scope for diversification and investments in R&D, and company-specific skills. Although it has a positive impact on growth stability, it may result in overinvestment in mature industries and limit flexible resources allocation (Carlin & Mayer 2003).

The identification of ownership and control structure helps the understanding of business management and company development. Comparative analysis reveals that patterns of ownership and control emerge in response to institutional arrangements and prevail for as long as they offer an effective structure and decision-making context to generate profits (Demsetz 1983). With the growing interest in emerging economies, more attention has recently been given to arrangements which leverage control, including pyramidal structures, shareholder coalition, adoption of dual class shares and statutory provisions such as qualified majority or personal authorisation rights (Barontini & Caprio 2005; Sauerwald & Peng 2013). Studies on emerging markets depict different and more complex patterns of ownership and control than those noted in Anglo-Saxon economies and show that the emergent shareholder structure represents a dynamic reaction to the regulatory and institutional context. The ownership and control logic exemplifies the given corporate-institutional puzzle.

In this article, we draw upon the development of pyramidal structures in the context of an emerging market and identify firm-level characteristics that determine their adoption. This article is driven by two motivations. Firstly, the formation of pyramidal structures still remains an unexplored phenomenon in the literature related to ownership and control (Almeida et al. 2011). The suggested logic behind the emergence of pyramidal ownership refers to risk diversification (Almeida & Wolfenzon 2006), tax optimisation (Morck 2005), control leverage (Villalonga & Amit 2009), or the realisation of private benefits at the expense of minority shareholders (Bertrand, Mehta & Mullainathan 2002). However, so far no formal theory has been put forward to explain why pyramids are adopted, why they are used more often than other similar mechanisms (such as dual class shares) and why they are formed in countries at differing stages of economic and social development. Secondly, the emergence of pyramids appears to be particularly intriguing in the case of developing or transition economies that represent dynamically evolving institutional environments characterised with significant ownership turnarounds. The review of the existing literature shows that there is a gap in pyramid formation in transition economies such as Central and Eastern Europe (CEE). The CEE region, following the unprecedented institutional transition which took place there, constitutes an unique kind of natural experiment for observing the ownership change that took the form of extensive privatisation schemes of former state-owned enterprises (SOEs) and the dynamic emergence of newly founded firms (Hardi & Buti 2012).

We intend to explore the adoption of pyramids by addressing three alternative rationales – control leverage, venture set-up and governance – which provide alternative explanation for the formation of these structures. Based on review of the existing literature, we aim to test the use of pyramids in relation to ownership and control, in addition to operation within a business group. Adopting a panel study, we examine a sample of 168 non-financial companies listed on the Warsaw Stock Exchange (WSE) during the period 2010–2014. This article contributes to existing knowledge in two ways. Firstly, it fills a gap in the literature on the dynamics of ownership structure in emerging economies. We document the significant frequency of the use of pyramidal structures in Polish listed companies that has emerged within the last 10–15 years. Secondly, this article contributes to an understanding of the logic behind the adoption of pyramidal structures. We identify links between the formation of a pyramid and internal company characteristics such as concentration of ownership and control, ownership by financial investors, operation within a business group and the number of affiliated companies in the group. Specifically, we argue that pyramids serve as a tool supporting the development of companies within the business group, thus confirming the venture and governance rationale, whereas we do not find evidence for the notion of control leverage.

This article is organised as follows. The first section discusses alternative rationales behind the adoption of pyramids. The second section outlines the evolution of the ownership structure in the context of the emerging market of Poland. The third section reports the results of a linear panel model on the pyramidal structures in companies listed on the WSE and discusses their adoption with respect to the firm characteristics. Final remarks are presented in the conclusion section.

The systemic transition that started in CEE in 1989 represents a dramatic institutional change from socialism to democracy and from central planning to market economy (Coffee 1999). The system prior to 1989, characterised as ‘destroyed capitalism’ (Balcerowicz 1995), was based on state control and the paradigm of citizens’ ownership. Because of the lack of effective monitoring, reporting and performance-driven decision-making, the central planning doctrine proved to be highly inefficient in rights, incentives and assets allocation (Murrell 1999). The processes of decision-making and performance monitoring are heavily embedded in the shareholder structure. Thus, the transition, which aimed at the implementation of market-driven decisions for resource allocation and the adoption of economic efficiency principles as a means of performance evaluation, required significant ownership reforms. In effect, over the last 28 years, companies in transition economies have experienced a significant turnaround of ownership structure, resulting from either privatisation schemes (Wang & Judge 2012) or the emergence of a new structural arrangement in the case of newly founded firms (Dobak 2008). This evolution is visible in the CEE region as well as in China, India and countries in Southeast Asia. Such a post-transition environment offers a unique opportunity for identifying the dynamics of shareholder structure and for exploring the emergence of new ownership and control patterns.

In the case of Poland, the ownership shift has been based on four main programmes – the so-called case-by-case privatisation, mass privatisation, liquidation and the rise of de novo firms. Firstly, the case-by-case privatisation took the form of the takeover of former SOEs by industry or individual investors, either via direct sale or via sale of the dominant stake in combination with an IPO on the stock exchange. This scheme included over 2300 companies of which 1560 were covered by the employee stock ownership plans (Ruszkowski 2010). Secondly, the politically delayed mass privatisation programme was carried out by National Investment Funds (NFI) and covered 512 companies. This scheme engendered costly and complex structures and was found to be the least efficient privatisation programme, and the NFI portfolio companies were either sold to investors or liquidated. Thirdly, over 1900 firms were found to be structurally and permanently inefficient and were put into liquidation.

In summary, according to the report by the Ministry of Treasury (2016) of 8453 SOEs operating as of 31 December 1990, 6003 SOEs went through some form of ownership restructuring between 01 August 1990 and 31 December 2015, with the following breakdown:

Finally, the picture of ownership structure has significantly transformed with the growth of newly established companies controlled by founders. The trend strengthened with the economic development following Poland’s accession to the European Union in May 2004. Both the privatisation of SOEs and the emergence of de novo firms contributed to the development of the stock market. Currently, the WSE hosts 487 companies with an estimated total of €260 billion in capitalisation, accounting for ca. 55% of gross domestic product (GDP),¹ whereas the New Connect Market (Alternative Market System) has expanded rapidly and currently lists 403 companies.

In short, the concentrated and state control of enterprises in socialistic Poland has been replaced with the concentrated ownership and control by industry and private investors in the context of a post-transition, emerging economy. New patterns of pyramidal ownership and dual class shares have developed from scratch, becoming dominant mechanisms for exerting control leverage within listed companies. Such patterns were formed as a reaction to the new institutional environment and to market opportunities. Studies show that Polish companies reveal a significant concentration of ownership, characterised by an average stake of the largest shareholder estimated at 41% of shares (Aluchna 2007; Urbanek 2009). The largest group of companies with respect to their historical origin is represented by privately founded firms which were established after 1990 and, in the process of development, were listed on the stock exchange. In terms of investor identity, domestic individuals are the most frequent majority shareholders, followed by domestic and foreign industry investors (Urbanek 2009). Approximately 80% of listed companies form business groups, adopting the form of holdings with the dominant parent and affiliated companies, some of which are financial vehicles. Blockholders are also prone to adopt mechanisms increasing the concentration of votes, including dual class shares and shareholders’ coalition agreements; mechanisms increasing the power of voting rights, such as qualified majority or personal authorisation rights; and mechanisms for leveraging control with the use of pyramids. Thus, the Polish perspective concerning ownership and control corresponds with the post-transition and emerging market characteristics based upon the role of hierarchies (Bedo & Acs 2007; Hardi & Buti 2012). As noted by Berglöf and Claessens (2006), emerging and transition economies are characterised by ownership concentration. As majority shareholders are involved in governance and management, companies do not reveal the separation of ownership and control. The control role is played by blockholders, whereas the monitoring function of external mechanisms (stock markets and markets for corporate control) remains significantly weaker (Berglöf & Claessens 2006). The board is unlikely to be influential when the controlling owner can hire and fire board members, while its potential for monitoring remains unexploited and structurally limited.

The analysis of the sample of 168 non-financial Polish listed companies for the period of 2010–2014 provides descriptive statistics and the verification of the hypotheses to explain the emergence of pyramidal structures. These results add to our understanding of the ownership and control arrangements and contribute to explaining the formation of pyramids in listed companies (Almeida & Wolfenzon 2006; Renneboog 1998). As the descriptive statistics demonstrate, the sample companies reveal a significant ownership concentration, estimated at 39% of shares controlled by the largest blockholder. The concentration rises to 42% in the case of shareholder coalitions. This finding is consistent with earlier studies on CEE in general (Bedo & Acs 2007) and on Poland in particular (Aluchna 2007). Over half of the companies in the sample adopt a pyramidal structure, revealing the importance and popularity of this dynamically emerging ownership pattern. Poland is placed amongst numerous developed countries (Morck 2004) and emerging markets (Ramachandran & Marisetty 2009; Su 2015), where pyramids appear to be a popular form of ownership. Interestingly, the adoption of a pyramidal structure is more popular than the use of dual class shares occurring in 10% of sample companies, which remains in line with previously conducted research on other countries (Almeida & Wolfenzon 2006; Holmen & Högfeldt 2005; Zattoni 1999). The pyramids identified in Poland comprised of basic, typically three-tier, structures, which make them relatively small and uncomplicated forms in comparison with their peers in Western Europe or Asia (Morck 2005; Morck et al. 2004).

We test three alternative rationales for explaining the formation of pyramids, including the notions of control leverage, venture and governance. The findings of the panel model reveal a number of observations on the company characteristics which determine the use of pyramids. Firstly, testing for the control leverage motivation, we note the positive link between the adoption of a pyramid and higher ownership concentration, which does not support hypothesis H1. Additionally, the adoption of a pyramid is also associated with lower ownership concentration by a shareholder coalition, which does not support hypothesis H2 either. A pyramid, as viewed in the literature as the mechanism of control leverage (Villalonga & Amit 2006) and the separation of control and cash flow rights (i.e. participation in profit) (Claessens et al. 2002), should allow for maintenance of control while lowering the engaged capital at the same time. This is not the case in our study, as combining pyramids and ownership concentration questions this line of argument as both mechanisms have the opposite effect (Morck 2009). These findings suggest that we should reject the control leverage rationale which views the separation of control and cash flow rights as the main driver for the use of pyramidal structures. Our results show that shareholders in a pyramid maintain their investments at a higher proportion than would make rational sense for control leverage. Additionally, they are not interested in fragmenting their ownership stake and forming coalitions (Bianchi & Bianco 2006) to minimise personal investment (Bebchuk et al. 2000; Villalonga & Amit 2006). This finding is consistent with the observation that some pyramid-controlled firms reveal a minor separation between cash flow and votes. Almeida and Wolfenzon (2006:2641) argue that ‘(…) pyramidal structures with small deviations are more likely to appear in poor investor protection countries’ which is the case of post-transition and emerging economies such as Poland.

In testing for the venture rationale, we reveal a positive relationship between the adoption of a pyramid and company operation within a business group (supporting hypothesis H3) as well as a smaller number of affiliated companies (supporting hypothesis H4). We argue that these observations indicate that pyramids are likely to be used to expand within the business groups, which provide easier access to finance and enable the founding of new ventures. These findings are consistent with the venture notion (Almeida et al. 2011; Almeida & Wolfenzon 2006). They suggest that pyramidal structures become a tool for expansion of the business group, an important factor in an environment of costly access to external capital (Almeida et al. 2011). The arrangements of a business group provide access to funds on the internal capital market and lower the risk of the new venture (Demsetz & Lehn 1985; Khanna & Yafeh 2005; Kornbluth & Salkin 1994). This finding corresponds with the arguments by Almeida and Wolfenzon (2006:2640), who note that the pyramidal structure is chosen by a company ‘because of the payoff and financing advantages it provides when new firms are expected to yield low-security benefits relative to the required investments’. Companies which adopt pyramids are able to enjoy all these benefits within the more complex organisational structure of a business (corporate) group (Radygin 2007), which appears to be particularly important in transition and emerging economies.

Finally, we test for the governance rationale and identity that the adoption of a pyramid is associated with investment by financial investors (supporting H5), which we interpret as the use of a founding financial intermediary by the controlling shareholder, who constructs the pyramid in order to avoid a direct ownership involvement. Interestingly, the ownership stake of portfolio-oriented financial investors is inversely related to the adoption of a pyramid, as is consistent with hypothesis H6. We argue that this finding is consistent with the governance rationale (Edwards & Weichenrieder 2004). Portfolio-oriented financial investors are likely to avoid excessive control by the blockholders. They anticipate the possible costs and shortcomings of the pyramidal structure (Villalonga & Amit 2009) attributed to the risk of expropriation by large shareholders who may extract private benefits.

In summary, we believe that the evidence from Polish listed companies may explain the rationale for pyramid adoption in the context of emerging markets. This may have practical implications for understanding the motivation of entrepreneurs and company founders to use pyramids in order to secure growth and expand their companies. Further research could look for possible differences in motivation for pyramid use in developed and developing economies. One single rationale may not explain the adoption of pyramids worldwide.

This article sheds lights on the frequency and adoption of pyramidal structures and fills a gap in the existing literature on ownership and control in the context of emerging markets. We aim to identify the popularity of pyramids with listed companies and their adoption with the reference to three main perspectives. Firstly, we link the adoption of pyramids to ownership concentration and shareholders’ coalitions with a rationale of separating cash flow and control rights, that is minimising capital investment while retaining control over the company. The second alternative explanation assumes that pyramids provide a device for the development of new companies within a business group that provides access to capital and enables founding new ventures under a weak institutional environment. Finally, the third perspective emphasises the efficient governance and lower transaction costs via the control of a financial entity accompanied by lower investment from portfolio-oriented financial investors.

Our evidence indicates that pyramids are an important ownership and control arrangement. Pyramids are adopted by over 50% of sample companies and remain a more popular control mechanism than dual class shares. Their adoption is related to a larger ownership concentration by the first largest blockholder, lower concentration by a shareholder coalition, operation within a business group of a lower number of affiliated companies, as well as a larger investment of financial investors with a smaller stake controlled by portfolio-oriented financial investors. Consequently, we do not observe the motivation to separate cash flow and control rights as the main driver for adopting pyramids. Our findings support the venture approach, which views pyramids as a device for establishing new companies within a business group. Pyramidal structures become a tool for expansion of the business group, important in an environment of costly access to external capital because the business group enables the raising of capital and lowers the risk posed to a new firm. Finally, governance in a pyramid by financial entities discourages investment by portfolio-oriented financial investors.

This research reveals several limitations. Our results are based on a panel model over a 5-year period, while a wider time span would help address the dynamic evolution and persistence of pyramids in Poland. Moreover, the ability to analyse the emergence of pyramids in other Central and Eastern European countries would give us the opportunity to relate our results to the wider context of emerging markets.