When a large corporation acquires a smaller company or establishes a new subsidiary, one of its first strategic decisions is how closely to integrate the new unit — both operationally and financially. This balance determines whether the parent shoulders most of the risks and profits alone or chooses to share them with outside investors. The choice is rarely straightforward, as it involves weighing the benefits of control against the dangers of exposure. Korean chaebols such as Samsung and Hyundai illustrate one approach: they retain firm management control while reducing their financial commitments by inviting other investors to participate. In doing so, they maintain influence over subsidiaries without bearing the full risk burden.

This intriguing phenomenon inspired Metin Sengul, professor of management at Texas McCombs, to investigate why firms often create a deliberate “wedge” between their rights to control subsidiaries and their rights to claim financial returns. He notes that this wedge is not accidental but carefully designed and adjusted to serve different corporate strategies. In collaboration with Tomasz Obloj of Indiana University, Sengul examined French government data covering 133 manufacturing companies. Together, they studied 843 cases of subsidiaries that were either created or acquired between 1997 and 2004, providing a rich foundation for analysing ownership structures.

Their findings revealed that, on average, parent firms maintained a 21% wedge between control rights and financial rights. For instance, a company might retain 100 per cent control over a subsidiary’s operations while claiming only 79 per cent of its profits. Importantly, this wedge was not uniform but shifted according to two internal factors: relatedness and multimarket contact. Relatedness refers to how closely a subsidiary’s activities align with its parent’s other operations. The greater the similarity, the smaller the wedge became, as firms tended to increase their financial stakes in subsidiaries that promised synergies.

The logic behind this behaviour is apparent. When subsidiaries are strategically aligned with the parent’s other businesses, opportunities for cost savings, innovation, and coordination increase. Parent companies, therefore, have more substantial incentives to capture a larger share of the profits. A case in point is PSA Group, the French automaker behind Peugeot and Citroën, which tended to hold tighter ownership of subsidiaries that shared suppliers or manufacturing technology. Here, synergy translated directly into financial commitment, as complete alignment increased the benefits of internalising profits.

In contrast, when uncertainty was high, parents often preferred to spread the risk. Sengul highlights the 1990s partnership among GM, Chrysler, Daimler-Benz, and BMW to explore hybrid vehicle technologies. At that time, the commercial prospects of hybrids were highly uncertain, long before Tesla reshaped the market. None of the companies assumed majority control or financial dominance. By sharing both authority and risk, they collectively invested in innovation while insulating themselves from the potentially steep costs of failure.

The dynamics of multimarket contact added further complexity. Parent firms tended to take higher financial stakes when subsidiaries competed with a moderate number of rivals across multiple markets, because those subsidiaries often generated substantial profits under manageable competition. Yet when the overlap with competitors was too significant, parents deliberately reduced their control and financial rights to avoid provoking retaliation. Sengul’s research ultimately demonstrates that ownership decisions cannot be reduced to financial logic alone. Instead, they represent carefully calibrated strategies designed to balance control, risk, coordination, and competitive dynamics. As he concludes, ownership is about more than control — it is about creating and capturing value in an increasingly complex and competitive corporate landscape.

More information: Metin Sengul et al, Ownership as a Bundle of Rights: Antecedents of the Wedge Between Control and Cash-Flow Rights Within Firms, Strategy Science. DOI: 10.1287/stsc.2022.0114

Journal information: Strategy Science Provided by University of Texas at Austin