HEC Research Papers Series,
HEC Paris

Abstract: We examine the influence of interdependencies on parent companies’ cash flow rights in their subsidiaries, focusing on two forms of interdependency that characterize multiunit firms: relatedness and multimarket contact. Specifically, we argue that interdependencies affect the extent of a parent’s cash flow rights in a subsidiary through their influence over value creation and the value capture potential of that subsidiary. Accordingly, we hypothesize that parent companies will have higher cash flow rights in highly related subsidiaries. We also hypothesize that there will be an inverted-U shaped relationship between the extent of multimarket contact and parents’ cash flow rights in subsidiaries that operate in industries with multimarket rivals. We tested our predictions and found corroborating evidence in a sample of subsidiaries that had been newly added to French manufacturing firms. In supplementary analyses, we also found that relatedness and multimarket contact affect the position of a new subsidiary in the hierarchical structure of a firm, as measured by the subsidiary’s number of direct paths to and hierarchical distance from the parent. Our study, which builds on the theory of ownership as a governance mechanism, provides initial evidence surrounding the role of interdependencies as antecedents of cash flow rights within multiunit firms.

Keywords: organization design; interdependencies; ownership; multi-subsidiary firms; relatedness; multimarket contact

JEL-codes: M10

45 pages, June 7, 2022

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