This paper presents an equilibrium model of ownership structure in business groups and investigates which structures are derived in equilibrium. This paper also analyzes the effects of ownership structure on payoff distribution between a business group founder and external investors. Moreover, this paper examines the impacts on ownership structure of corporate policies such as the ban on cross-shareholding, shareholder-oriented legislation, and introduction of dual class shares. 

We find that seven ownership structures are derived in equilibrium, which include Horizontal Structure (type I), Vertical Structure (type II-1), Vertical Structure with Cross-shareholding (type II-2), Hybrid Structure without Cross-shareholding (type III-1, III-2, III-3), and Hybrid Structure with Cross-shareholding (type IV). We also derive net payoffs of the business group founder, external investors, and the whole society under each ownership structure, and find that the net payoffs are all positive under certain conditions. This implies that, under the conditions, the business group founder has the incentive to build firms, and the external investors have the incentive to invest in the firms and therefore the seven ownership structures are all feasible and socially desirable. 

We then compare the net payoffs among the seven structures and find that the net payoffs of the business group founder and the society as a whole are higher under structures II-2, III-3, and IV than under the rest. This result implies that the ban on cross-shareholding might conflict with efficiency. 

Finally, we find that the structures II-2 and IV are not involved in an equilibrium any more if we allow the business group founder to control the firms by using dual class shares. This suggests that cross-shareholding is closely related to the founder’s control power over the firms and that complex ownership structure among affiliated firms is also closely related to the lack of institutional device such as dual class shares.