When a larger company acquires a smaller one, or creates a new subsidiary, it must decide how cozy it wants to be — both operationally and financially.
For example, Korean chaebols — family-owned conglomerates such as Samsung and Hyundai — often maintain tight management control over subsidiaries while limiting their financial stakes. They invite other entities to invest in a subsidiary and share its profits as well as its financial risk.
Metin Sengul , professor of management at Texas McCombs, wondered why some companies structure themselves this way, with a gap or “wedge” between their control rights and rights to the subsidiary’s earnings.
Parent companies intentionally design and tweak this balance “for many different reasons,” Sengul says. But in new research, he finds two internal factors that influence those decisions:
With Tomasz Obloj of Indiana University, Sengul analyzed data from the French government on 133 French manufacturers. The duo studied 843 instances of those companies acquiring or creating subsidiaries between 1997 and 2004.
The average parent, they found, had a wedge of 21% between its control rights in a subsidiary and its financial rights, such as having 100% control but taking only 79% of the profits.
But the gap got smaller the more a subsidiary’s operations were related to those of its parent and other subsidiaries. An increase in relatedness shrank the wedge, meaning the parent increased its financial stake.
Synergies vs. Uncertainties
The effect was especially strong for new subsidiaries operating in industries where coordination and synergy with the parent’s other operations could drive cost savings and innovation.
For instance, in diversified conglomerates such as PSA Group (the former French carmaker behind Peugeot and Citroën), subsidiaries that share manufacturing technology or suppliers with the parent tend to be more tightly held, with high levels of both control rights and financial rights. The gap between the two is smaller.
“The closer the operational alignment, the more incentive there is for the parent to internalize the profits,” Sengul says.
As an example of an opposite kind of ownership structure, Sengul points to a partnership between GM, Chrysler, Daimler-Benz, and BMW in the 1990s to explore the creation of hybrid electric vehicles. None of them held majority control or financial rights, reflecting the venture’s high risks and uncertainties.
“Nobody knew if it would work,” Sengul says, noting it was long before Tesla. “You partner, because the financial risk is so much that you want to share with others. You don’t want to shoulder all the risk yourself.”
With multimarket contact, the relationships were more complicated. Parents tended to have higher financial rights in subsidiaries that compete with medium numbers of multimarket rivals. In those situations, the subsidiaries were most profitable — because they didn’t face intense competition — and parents reaped the rewards.
When a subsidiary had high overlap with multimarket rivals, however, a parent might want to avoid provoking retaliation from competitors. It would restrain its subsidiary, lowering both profits and financial rights.
Sengul says the findings challenge the assumption that ownership is only a financial decision. It suggests that large multiunit companies structure themselves not just to extract value, but to enable internal coordination and strategic alignment to create value.
“Ownership is not just about control,” says Sengul. “It’s about creating and capturing value in complex, competitive landscapes.”
“ Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms ” is published in Strategy Science.
Strategy Science
Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms
1-Jun-2025