This study investigates how the supply chain may affect inter-corporate ownership structure among member firms within the business group. Previous literature suggests that profitable firms are located at the top of the pyramidal structure directly owned by the controlling shareholders. However, profitability may be endogenously determined based on related party transactions. Specifically, suppliers within the business group may generate higher profits through exclusive sales contracts with member firms. Based on a sample of large business groups in Korea, I find that suppliers are more likely to be located in the upper part of the pyramid. This suggests that controlling shareholders’ incentive to expropriate corporate opportunity may be an important factor in structuring business groups.

JEL classification: L22, L23, G32, G34
Keywords: supply chain, ownership structure, pyramid, business groups