Investment Pyramid Layers and Investment Efficiency

In this study, I would like to examine how investment layers relate to firm-level capital investment efficiency. I first argue that investment layers will reduce investment efficiency because the complex process of transferring information from the lowest-tier firms to the parent company on the apex of investment structure can increase information asymmetry between the firm and outsiders. Besides, as controlling shareholders usually expropriate resources through the pyramid investment structure, I argue that the agency problems between management and outside capital providers can increase as the number of layers increases. Using the negative sensitivity of investment to cash flow as a proxy for investment efficiency, I find that the number of investment layers in firms’ investment structure is negatively related to investment efficiency.