The Illusion of “Too Big to Fail” and “Soft Budget Constraint” under the Pyramidal Ownership Structure

Against the backdrop of continued attention to the “too big to fail” (TBTF) phenomenon reflected by the explosion of debt defaults by non-financial corporate groups, this paper builds a bank loan model of pyramidal structure affecting firm leverage, and empirically reveals the unique phenomenon of budget soft constraint contained in pyramidal structure and the illusion of TBTF by using the sample of A-share non-financial and non-state listed firms. With the increase in pyramidal structural complexity, the leverage ratio and the degree of excessive indebtedness of listed firms increase significantly. The mechanism study finds that the pyramidal structure mainly functions through the credit-distorting inflation mechanism under the soft budget constraint. The pyramidal structure reduces the short-term risk of firms but ignores the accumulation of long-term risk, which may be the cause of the TBTF illusion. During the mandatory deleveraging period, pyramidal-structure firms exhibit a structural deleveraging phenomenon of slow leverage breakdown. This study provides a new analytical perspective to understand the TBTF phenomenon, and helps theoretical scholars to understand the potential functions of pyramidal structures in the economic sphere.