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How Weak is the Weakest-Link Principle?On the Measurement of Firm Owners’Control Rights

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  • Jeremy Edwards
  • Alfons Weichenrieder

Abstract

The paper argues that the weakest link principle, which has been widely used as a measure of ultimate owners’ control rights, has a number of serious problems. A theoretically more satisfactory method of measuring control rights, based on voting power indices, is proposed, and the different measures are compared using a sample of large listed German firms. Thedifferent measures produce very different results. But, whichever measure is used, taking account of pyramid ownership structures has little effect on the values of control and cashflow rights. The results also show that neither first-tier nor ultimate control rights measures are adequate on their own, suggesting that further work on ownership structure and pyramids is required to obtain satisfactory measures of large owners’ control rights.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1255.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1255

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Keywords: corporate governance; control rights; weakest-link principle.;

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  1. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 781-93, May.
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  16. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 54-78, March.
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  18. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(3), pages 325-351, June.
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Cited by:
  1. repec:pdn:wpaper:1 is not listed on IDEAS
  2. Wolfgang Eggert & Alfons Weichenrieder & Jeremy S.S. Edwards, 2006. "The Measurement of Firm Ownership and its Effect on Managerial Pay," Working Papers CIE 1, University of Paderborn, CIE Center for International Economics.

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