Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms

In this paper, we examine the antecedents of ownership rights within multiunit firms, focusing on the wedge between the control rights and cash-flow rights that parent companies hold over their subsidiaries. We argue that a key antecedent of a parent's ownership rights in a subsidiary is the extent of the subsidiary's interdependencies with the firm. Exploring two such interdependencies, we hypothesize that (1) the wedge between parents' control and cash-flow rights is smaller for subsidiaries that are more closely related to the firm and (2) there is a U-shaped relationship between the extent of a firm's multimarket contact in an industry and the wedge between parents' control rights and cash-flow rights for subsidiaries that operate in that industry. We tested our predictions and found evidence supporting the first hypothesis and mixed results for the second in a sample of subsidiaries newly added to French manufacturing firms through acquisitions or de novo creations. In supplementary analyses, we also found that a subsidiary's interdependencies are also associated with its hierarchical position within the firm's formal authority structure.