Is the Separation between Cash Flow and Control Rights a Good Proxy for Minority Shareholder Expropriation?

Abstract

Numerous studies use the wedge between cash flow and control rights as a proxy for the risk of controlling shareholders expropriating minority shareholders. They interpret the negative relationship between the wedge and firm value as a relationship between expropriation and firm value. We show that the wedge is endogenously related to firm characteristics which drive the position of the firm within the pyramid. Any power of the wedge to explain firm value can be attributed to the effect of these firm characteristics. We conclude that the widely used wedge is not a good proxy for the expropriation of minority shareholders.

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