Research profile: The shape of things to come?

Powerful business groups, organized as pyramids, wield substantial influence by precluding other firms from joining the industry.

By blocking other firms’ ability to acquire capital they can stifle competition. Like parents, their actions can result in an unequal concentration of wealth and power but also in the birth of new and flourishing firms. It is these opposing results that fascinate Associate Professor Ortiz-Molina, policy makers, and politicians alike.

Ortiz-Molina and Professor Jan Bena study factors associated with the creation of pyramidal structures. These pyramidal entities develop when a large parent organization has equity in a firm and that firm has equity in another and so on.

Their research, on these large and visible pyramids or business groups, uncovers the existence of much smaller pyramids where important entrepreneurial activity takes place.

Academics who study pyramids have argued that they are often developed to allow powerful individuals to control many firms with only a small investment.

“There may be other causes,” suggests Ortiz-Molina, “as this structure, akin to a parent-child relationship, makes it relatively easy for funds to be transferred between related firms.

"The child, or smaller firm, may not have access to the kind of financial resources available to the parent and this financial support is needed to create new ventures or to keep an existing business afloat. Thus, pyramids play an important role in the financing of new firms.”

Ortiz-Molina has conducted research on several other topics including executive compensation, shareholder rights, the cost of external financing, and the influence of labor unions on financial decisions, as well as ownership pyramids.

He has received accolades for his work on the financial impact of labour unions within industry; work that is redefining how firms leverage the presence of unions within their organizations. Collaborating with colleagues from Sauder and other internationally acclaimed business schools, his group has undertaken research that demonstrates the significant impact that unions have on a financier’s return on investment or a firm’s cash reserves.

Firms with unions that have strong bargaining powers often have less flexible operations and thus are considered more risky by equity investors who require higher returns on their investment. In order to reduce unions’ ability to extract concessions from shareholders, some companies will undermine the union’s bargaining power by maintaining smaller cash reserves. Less money means fewer opportunities for unions to leverage salary and benefit increases thereby weakening their power.

It was this focus on power that has led Ortiz-Molina to investigate other areas in the investment field that are related to control, such pyramidal structures.

Learn more about Professor Ortiz-Molina and his latest research interests.