Optimum Structure of Corporate Groups

Abstract

Corporate groups consist of a set of companies, often described as subsidiaries, which are usually controlled by one single entity, the parent or holding company. The term control means the parent company’s rights to direct the relevant activities of other companies. A parent company can control a subsidiary either directly or indirectly through its voting power. Groups’ structure can be very complex usually with multiple crossholding and loop participations driving to not observable sharing rights. The aim of this paper is to examine how the parent company of a group with given participation rates can increase its capital by changing the share structure of the group and maintain management control over the group while the least capital comes from the majority. Furthermore, using evolver software we derive to the new optimal structure of the group and the maximum parent’s cash inflow from shares exchange. The value of this research to show the possibility for a parent company to create additional capital, by maximizing the minority interest, and at the same time direct voting rights in its favor.