Paper Title: Trading favors within Chinese groups Discussant: Federica Capriglione Abstract Pyramidal structures is a dominant aspect of ownership in the developing world, which allow shareholders to control corporations with relatively low investments. On the one hand, the mismatch of cash flow and control rights leads to a range of agency problems and resultant resource misallocations, potentially impacting the macro economy. On the other, pyramids are one important mechanism that enables the formation of diversified business groups that are a dominant feature of business organization in much of the world. The paper aims to give an illustration of this within-firm trade-off of costs and benefits in the context of publicly traded firms in China. Moreover, capital investment and firm performance are investigated from the perspective of pyramidal ownership structure. In the last part of paper it is examined why when a listed firm gets into financial trouble and is designated as special treatment (ST) firm by the regulatory authorities, could have generated overwhelmingly favorable market reactions. That will be considered from the perspective of “tunnelling” and “propping up” practice within Chinese listed firms. 1. Introduction A dominant aspect of ownership in the developing world is pyramidal structures, which allow shareholders to control corporations with relatively low investments. The uneasy relationship between these controlling investors and minority shareholders, and the potential impact on the broader macro economy, has been well-studied by corporate governance scholars. On the one hand, the mismatch of cash flow and control rights leads to a range of agency problems and resultant resource misallocations, potentially impacting the macro economy. On the other, pyramids are one important mechanism that enables the formation of diversified business groups that