In the complex realm of corporate acquisitions and subsidiary formation, one of the most intricate strategic decisions a parent company faces involves calibrating the balance between operational control and financial stake. This nuanced equilibrium shapes not only how closely the parent supervises its subsidiary’s day-to-day activities but also how much of the subsidiary’s earnings the parent claims. Recent research conducted by Professor Metin Sengul of Texas McCombs, in collaboration with Tomasz Obloj from Indiana University, sheds new light on why firms often maintain a “wedge” between control rights and financial rights in their subsidiaries, challenging traditional assumptions about corporate ownership.
Large conglomerates and multinational corporations commonly possess significant control over their subsidiaries. However, it is not always the case that such control translates directly into proportional financial entitlement. In fact, Sengul and Obloj’s analysis of extensive French manufacturing data revealed an average 21% gap between control rights and cash-flow rights. For instance, a parent might exercise full managerial control over a subsidiary while claiming only 79% of its profits. This deliberately engineered structure raises compelling questions about the strategic motivations behind partial financial ownership alongside near-total control.
At the core of this ownership conundrum lie two critical internal factors that influence how companies architect their subsidiary relationships: relatedness and multimarket contact. Relatedness refers to the degree of operational similarity or synergy between a subsidiary’s business and the parent’s other ventures. Multimarket contact describes the intensity of competition faced when the parent and subsidiary operate in overlapping markets across regions or product lines. These dimensions drive the extent to which a parent seeks to internalize profits or shares economic risk, thereby determining the extent of the wedge.
The research underscores that when a subsidiary’s operations are closely aligned with the parent’s core businesses, the wedge diminishes substantially. This convergence is intuitively linked to the value that operational synergies—such as shared technologies, joint supply chains, or integrated manufacturing processes—can generate. For instance, automotive conglomerates like France’s PSA Group, which owns Peugeot and Citroën, frequently exhibit ownership patterns marked by both high control and high financial stakes in subsidiaries. Within such tightly knit networks, enhanced coordination not only drives cost efficiencies but also fosters innovation, providing strong incentives for the parent to claim a greater share of profits.
Conversely, when subsidiaries operate in less related or more uncertain environments, companies tend to deliberately maintain a wider wedge, opting for less commensurate financial stakes despite high control rights. This phenomenon aligns with the strategic need to share financial risks associated with uncertainty. One illustrative example examined by Sengul is the 1990s collaboration between automotive giants GM, Chrysler, Daimler-Benz, and BMW to pioneer hybrid electric vehicle technology. None of the partners held majority control or financial rights, reflecting high risks and unknown market potential. Such joint ventures exemplify how firms use ownership structures not just to claim value but to distribute the burden of uncertainty and foster cooperative innovation.
Beyond relatedness, multimarket contact introduces additional complexity into ownership strategies. When subsidiaries and parent companies confront a moderate number of shared competitors across different markets, parents tend to increase their financial claims. This scenario represents an optimal competitive landscape where subsidiaries generate above-average profits, free from excessively harsh rivalry. The parent’s amplified stake in these cases allows it to capture more of the subsidiary’s economic benefits while maintaining control.
However, a different pattern emerges when multimarket contact becomes intense, with high overlap among competitors. Under such circumstances, the parent frequently tempers its financial and managerial demands on the subsidiary to avoid triggering aggressive retaliatory moves from competitors. Restrained ownership stakes function as a strategic buffer, mitigating the potential for conflict and protecting longer-term profitability and market stability. Sengul’s findings complicate earlier assumptions that ownership concentration is a purely financial calculus; instead, ownership becomes a lever for strategic nuance, signaling cooperative or competitive postures in a crowded marketplace.
This research ultimately reframes corporate ownership decisions as multi-dimensional, going far beyond simplistic metrics of financial gain. Not only must parent companies manage internal coordination challenges, but they must also navigate the tangled interplay of external competitive dynamics. Ownership is conceived less as a static entitlement and more as a dynamic, evolving bundle of rights—encompassing operational control, financial claim, and strategic signaling—that must be skillfully managed to maximize overall corporate value.
Critically, these findings have practical implications for multinational corporations, private equity firms, and strategic investors negotiating joint ventures, mergers, or restructuring initiatives. Awareness of relatedness and multimarket contact can inform the design of ownership and governance arrangements that balance incentives, manage risks, and optimize competitive positioning. In a global business landscape marked by rapid technological change and fierce rivalry, flexibility and sophistication in subsidiary ownership modeling emerge as vital sources of sustained advantage.
Professor Sengul’s insights also invite a broader reconsideration of longstanding theories in corporate finance and strategy concerning the purposes and mechanisms of ownership. The deliberate “wedge” between control and cash-flow rights demonstrates how companies deploy legal and financial engineering to solve complex internal and external challenges. It is a reminder that financial stakes are only one component of multifaceted ownership structures, which serve to facilitate collaboration, encourage innovation, manage uncertainty, and modulate competition.
As corporate ecosystems continue to evolve amid digital transformation and globalization, understanding the nuances revealed by this research becomes increasingly consequential. Companies that intuitively deploy varied ownership configurations to align interests and balance risks will likely outperform those adhering to simplistic, uniform models. Sengul and Obloj’s study contributes a rigorous empirical foundation and compelling conceptual framework that enriches the strategic toolkit available to modern business leaders and policymakers.
In sum, the architecture of ownership within firms is a deliberate and intricate design, shaped by the interplay of operational relatedness and competitive environments. By modulating the balance between control and financial rewards, parent companies tailor their engagement with subsidiaries to optimize synergy potential and risk allocation. This emerging perspective opens fresh pathways to decode the strategic logic behind corporate conglomerates’ internal structures, with profound relevance for future research and practice in business strategy and finance.
Subject of Research: Corporate ownership structures and the factors influencing the gap between control rights and financial rights within subsidiaries.
Article Title: Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms
News Publication Date: June 1, 2025
Web References:
- https://www.mccombs.utexas.edu/faculty-and-research/faculty-directory/profile/?username=ms95944
- https://pubsonline.informs.org/doi/10.1287/stsc.2022.0114
References:
Metin Sengul and Tomasz Obloj, “Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms,” Strategy Science, June 1, 2025. doi:10.1287/stsc.2022.0114
Keywords: Corporate ownership, control rights, financial rights, parent-subsidiary relationships, relatedness, multimarket contact, corporate strategy, operational synergy, competition, joint ventures.
