30 Corporate Finance
A share is a share in the share capital of the company. Each share entitles the holder to exercise one vote
at the annual general meeting. If this is true, then the value of the share should be the same for all shareholders
irrespective of how many shares one is holding—one million or 100 shares. Glance through the financial
dailies and magazines. Company after company is acquired for hefty premium. Majority shareholders (i.e.,
promoters) control many of these firms. Why do they pay hefty premium? Does the benefit accrue to all the
shareholders? Unlikely. The answer lies in the benefits of being in control which accrue to the majority
shareholder but not to minority shareholders.
The next logical question to ask would be: What are those benefits and how are minority shareholders
affected? The obvious benefits are the status bestowed upon the head of the company by society, love and
affection bestowed by family and friends, ability to buy larger than optimal size computer to play with, plush
carpets, corporate jets, etc. The sum of these benefits will not add up to the premium paid. The less obvious
benefits are: the value of benefits arising out of access to information in related businesses and the ability to
fix transfer prices between the company and its suppliers and customers.
An example will clarify the point. Let’s suppose a foreign parent has two subsidiaries in India, one of
which is a wholly owned subsidiary and the other, a 51 percent subsidiary. If the foreign parent transfers
profitable brands and businesses from a long established 51 percent subsidiary to a newly formed 100 percent
subsidiary at low prices, the minority shareholders of the 51 percent subsidiary suffer a loss. Another form of
rip-off is collecting royalties for the use of a brand that the subsidiary has built through years of advertising.
The parent takes the earnings pie away leaving the minority shareholders in dismay. Yet another form of rip-
off is to acquire a more or less related business where the promoter has business interest through the holding
company and further his/her interest without sharing any of those benefits with the minority shareholder.
Academic studies suggest that the value of control is about 30 percent of market value of equity in Italy,
10–20 percent in Switzerland, the UK and Canada, and 4 percent of firm value in the US. The value of rip-
off by majority shareholders is at least partly reflected in the premium paid for the target company. Maximizing
shareholders’ wealth is fine, but which shareholder: majority or minority?
When the risk of expropriation is high, investors either refrain from investing in closely held firms or
demand a discount on the company’s securities. When the risk of expropriation is very high, the discount can
be as high as 60 percent. But concentrated ownership in itself is not a bad thing. An obvious advantage of
concentrated ownership is that it gives the owners better incentives to monitor firms and make necessary
changes in management. Diffused ownership, in contrast, does not provide adequate incentives. If concentrated
ownership indeed leads to better oversight by managers, we would expect positive correlation between
Exhibit 1.3 Control of publicly traded companies in East Asia in 1996 (in percent)
Corporations with ultimate owner
Widely held
No. of Widely held financial Widely held
Economy corp. corporation Family State institution corporation
Hong Kong 330 7.0 71.5 4.8 5.9 10.8
Indonesia 178 6.6 67.3 15.2 2.5 8.4
Japan 1,240 85.5 4.1 7.3 1.5 1.6
Korea 345 51.1 24.6 19.9 0.2 4.3
Malaysia 238 16.2 42.6 34.8 1.1 5.3
The Philippines 120 28.5 46.4 3.2 8.4 13.7
Singapore 221 7.6 44.8 40.1 2.7 4.8
Taiwan 141 28.0 45.5 3.3 5.4 17.8
Thailand 167 8.2 51.9 24.1 6.3 9.5
Source: Claessens et al. (1999).