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

35 Pages Posted: 17 Sep 2004

See all articles by Jeremy Edwards

Jeremy Edwards

University of Cambridge - Faculty of Economics and Politics; CESifo (Center for Economic Studies and Ifo Institute)

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 2004

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. The different 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.

Keywords: corporate governance, control rights, weakest-link principle

JEL Classification: G32, G34

Suggested Citation

Edwards, Jeremy and Weichenrieder, Alfons J., How Weak is the Weakest-Link Principle? On the Measurement of Firm Owners' Control Rights (August 2004). CESifo Working Paper Series No. 1255, Available at SSRN: https://ssrn.com/abstract=591902 or http://dx.doi.org/10.2139/ssrn.591902

Jeremy Edwards (Contact Author)

University of Cambridge - Faculty of Economics and Politics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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