Is the separation between ownership and control a good proxy for minority

shareholder expropriation?

Abstract

Numerous studies have used the difference (wedge) between ownership (or cash flow) and

control rights as a proxy for the unobservable risk of minority shareholder expropriation or

agency costs between controlling and minority shareholders. They attribute the negative

relationship between the wedge and firm value, found in previous studies, to the risk of

expropriation of minority shareholders or agency costs. However, the results of this paper

suggest that the wedge is endogenous and related to firm characteristics which drive the

position of the firm within the pyramid but are unrelated to the risk of expropriation. We

show that the significance of the wedge disappears when it is included alongside these firm

characteristics. So, any power of the wedge to explain firm value can be attributed to the

effect of firm characteristics that endogenously determine the position of the firm within a

pyramidal structure, and not on the risk of expropriation. We conclude that the findings of

previous studies need to be reinterpreted in view of the finding that the widely used

measure of the separation between ownership and control is neither a good nor a clean

proxy for the risk of expropriation of minority shareholders, tunneling or agency costs.

Keywords: control rights, cash flow rights, expropriation, ownership concentration, wedge

JEL Classification: G14, G34, F23, K42, M14