Study Asserts World’s Stocks Controlled by “Select Few” (Bad Studies That Confirm Conventional Wisdom Refuse to Die Edition)

Wow, there is nothing like searching through your archives for an anecdote you want to recycle only to discover that the post you used it in pre-debunked the very same paper that you are now girding up to debunk.

A whole bunch of readers sent me either links to a paper “The Network for Global Control” by physicists Stefania Vitale, Stefano Battiston and James Glattfelder, or to reports on it (for instance, at PhysOrg, which I put on a black list because it has embarrassed me too many times before readers by reporting reverently on dubious studies). I pre-debunked a report on an earlier version of this paper, as reported in Inside Science, by Battiston and Glattfelder.

Let’s look at a breathless summary per PhysOrg:

Using data obtained (circa 2007) from the Orbis database (a global database containing financial information on public and private companies) the team, in what is being heralded as the first of its kind, analyzed data from over 43,000 corporations, looking at both upstream and downstream connections between them all and found that when graphed, the data represented a bowtie of sorts, with the knot, or core representing just 147 entities who control nearly 40 percent of all of monetary value of transnational corporations (TNCs).

In this analysis the focus was on corporations that have ownership in their own assets as well as those of other institutions and who exert influence via ownership in second, third, fourth, etc. tier entities that hold influence over others in the web, as they call it; the interconnecting network of TNCs that together make up the whole of the largest corporations in the world. In analyzing the data they found, and then in building the network maps, the authors of the report sought to uncover the structure and control mechanisms that make up the murky world of corporate finance and ownership.

This paper is a garbage-in, garbage out analysis. It does a network analysis based on share holdings at an institutional level. The problem is that the authors never bothered to understand how shares are held and how voting behavior varies based on institutional arrangements. To put it another way, the problem with the study is its failure to understand ownership, control and voting behavior in the institutional funds management arena.

As our Richard Smith tartly noted, “This looks like a list of people who *aren’t* in control. And since they own so much equity worldwide, that is interesting too.”

Let’s raise a very basic issue: indexing. In the US, passive management or indexing has become very popular. Crudely speaking, index funds compete on an institutional level by how closely they track the index and how low they keep their costs. An index fund manage does not care a whit about how the management of the companies in his fund are doing. The investors in his fund would be upset to learn if the fund manager was wasting his time thinking about how to vote the shares in their funds at the annual shareholders meeting.

But the authors didn’t bother thinking about how index funds complicate their tidy story of big powerful institutions controlling the world.

Another gaping omission is shares in brokerage accounts held in street name. The owner is the individual investor but again, this study would treat it as owned by the broker, say, Merrill Lynch.

Richard added to the list of significant oversights in the study:

· Custodians only vote as instructed by their clients. The paper doesn’t distinguish shares held at custodians from shares in the name of the underlying investor. Custodians’ infrastructure to support voting international shares is really poor which tells you, all by itself, how much that’s done. And all the voting processes and rules vary from country to country. So internationally held shares may tend not to get voted either.
· Passive indexers don’t vote
· Many so-called ‘active’ funds, that are actually closet indexers, may not do so either.
· IB inventory is hard to vote: because of the potential conflicts of interest that arise there tend to be in-house lawyers in the loop. That does not streamline the process…
· Insurers and pension funds should vote but often don’t.
· Where is Blackrock? Where are the SWFs? Rolled into custodian totals? Or too small to show? We can’t tell.

As we indicated above, we saw this all coming in the beta version of this study. But since it hews with conventional wisdom, no doubt it will be touted despite being abjectly wrongheaded. Our August 2009 post:

Conspiracy theorists will have to wait until the article described in Inside Science is published to determine whether it delivers on its claims. It purports to analyze stock holding across 48 countries and alleges they are held in very few hands. But the work was done by physicists, which means they may not have understood the limits of the data they were working with.

I suspect this will wind up resembling a paper a friend studied in his graduate level statistical methods course over two decades ago (he has since gone on to a successful career in academia). Everyone in the seminar was assigned a single paper and told to analyze the techniques used and to present their findings to the class. This was the sole basis for the grade.

The paper my buddy got had already created a bit of a stir, although it had not yet been published. The author had looked at the prices at which the Fed did its daily operations (then the famed “noon buying rate”) and compared it to the results of Treasury auctions. The paper concluded the Treasury was doing a terrible job, as demonstrated in all sorts of analyses.

When my friend’s day to present came, he stood up and said, “I have only one comment to make. The Fed conducts its daily operations in transaction sizes ranging in the millions. Treasury auctions are in the billions. The Fed data is irrelevant to the Treasury analysis,” and sat down.

He received an A.

In this case, an obvious fly in ointment is many (most?) stocks are held in street name, meaning in the name of the brokerage firm or fund, not the ultimate owner. I presume it is impossible to segregate accounts where the broker has discretion to trade versus those where the clients simply trades through the securities firm.

But even if the analysis is flawed, it might stir up some interesting discussion.

From Inside Science (hat tip reader John D):

A recent analysis of the 2007 financial markets of 48 countries has revealed that the world’s finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power, and point out the worldwide financial system’s vulnerability as it stood on the brink of the current economic crisis. 

A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the “backbone” of each country’s financial market. These backbones represented the owners of 80 percent of a country’s market capital, yet consisted of remarkably few shareholders.

“You start off with these huge national networks that are really big, quite dense,” Glattfelder said. “From that you’re able to … unveil the important structure in this original big network. You then realize most of the network isn’t at all important.”

The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. Paradoxically; these same countries are considered by economists to have the most widely-held stocks in the world, with ownership of companies tending to be spread out among many investors. But while each American company may link to many owners, Glattfelder and Battiston’s analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market.

“If you would look at this locally, it’s always distributed,” Glattfelder said. “If you then look at who is at the end of these links, you find that it’s the same guys, [which] is not something you’d expect from the local view.”

Matthew Jackson, an economist from Stanford University in Calif. who studies social and economic networks, said that Glattfelder and Battiston’s approach could be used to answer more pointed questions about corporate control and how companies interact….

Based on their analysis, Glattfelder and Battiston identified the ten investment entities who are “big fish” in the most countries. The biggest fish was the Capital Group Companies, with major stakes in 36 of the 48 countries studied. In identifying these major players, the physicists accounted for secondary ownership — owning stock in companies who then owned stock in another company — in an attempt to quantify the potential control a given agent might have in a market….

Glattfelder added that the internationalism of these powerful companies makes it difficult to gauge their economic influence. “[With] new company structures which are so big and spanning the globe, it’s hard to see what they’re up to and what they’re doing,” he said. Large, sparse networks dominated by a few major companies could also be more vulnerable, he said. “In network speak, if those nodes fail, that has a big effect on the network.”

The results will be published in an upcoming issue of the journal Physical Review E.

Print Friendly, PDF & Email


  1. jake chase

    Any serious effort to analyze stock ownership would begin with dividend reports, assuming one can pry this information from the jaws of IRS. Chances are you cannot get it. Moreover, as Mozart said about believing and shitting, income and wealth are two very different things.

  2. Philip Pilkington

    Ahhh!!! I knew it. The New World Order (NwO) is coming! We’re all super-doomed!

    In other news, did anyone hear that a recent paper was presented at a UFO conference by wizard-brained super-genius David Icke showing quite categorically that 85% of people involved in the financial markets have more lizard DNA than they do human. I think the funding for the conference came from the Lyndon LaRouche organisation so we can be absolutely sure that the results weren’t tampered with by our lizard overlords. Something to think about when you’re tinkering with your tin-foil hat this evening!

    1. ambrit

      My Dear Mr Pilkington;
      Sir! You have revealed exoteric secrets to the Masses! For this you will be soundly Birched! The ceremony will occur at the Trilateral Temple. (And to think, calling someone ‘Lizard Breath’ is actually a compliment!)

      1. Philip Pilkington

        The FACT that many elites are part lizard and require human blood to sustain themselves is contested by some. Indeed, there has been a rigorous debate on whether this is the case or not by many Internetz personalities.

        Of course, if you actually THINK about it for a moment it will quickly become OBVIOUS that they are, in fact, lizards. Oh, it’s evidence you want. Hmmm…

    2. G Marks

      I’m willing to look at their DNA – they sure don’t resemble the people I’ve known in my life.

      I’m no hourly wage type… our whole family has been self employed since I was a child. Only when I lived in a Colorado Ski town did I meet people who fit Icke’s description.

      You can’t just visit Aspen or Telluride or Antilbe or Cannes… you have to have a contact there. Only then do you experience the ‘difference’ between some of these monsters and the rest of us.

      I have family in Aspen for 30 years. I’ve sat silently during the after dinner drinks between Presidents Club members…. Lizards? — that’s not too far off.

  3. moopheus

    If large chunks of stock are held by institutional entities in name only and the voting power of those stocks isn’t used, then presumably this is favorable to corporate management. I.e., they say they justify everything they do as being for shareholders, but they really have no idea what the stockholders’ opinions really are, and don’t want to know. And the people who have paid in for those stocks, the investors in the funds, have been cut off from their voting rights. I’d always assumed fund managers used the voting power of the stock.

    Would this also tend to increase the influence of wealthy individuals who own large blocks of stock in their own name? Or does it not matter?

    1. Nathanael

      Correct. In fact, corporate managements (a clubby bunch, actually) control the majority of global capital.

      The people who devise the indexes — S&P, for instance — have a lot of power too.

      It would be nice to do a study on corporate management / board interlocks. That has more value.

  4. Marcus

    1. If it’s held in an index fund, then isn’t that the same as saying the “index controls it” ie the broader market, ie the market movers have large influence?

    2. Are you trying to say that individual investors somehow have some influence? Hmmm. Let’s say wealthy investors for good measure, just not uber-wealthy.

    Please start over and write a less frothing article to show us why the paper is wrong for real.

    1. Yves Smith Post author

      Did you somehow miss the point?

      They used the wrong data. Aggregate data at an institutional level, particularly which includes shared held in custody, is irrelevant data. Please reread the example of the grad student and the study on Treasury auctions. It’s an exact parallel.

      You are exhibiting a classic, well documented cognitive bias. When people are presented with data that conflicts with existing prejudices, many reject the data and become more confident in their prejudice.

      The big problem, in case you missed it (and the study sure did) is that in liquid markets, selling shares is a much simpler and cheaper way to deal with management you don’t like than voting against management. With all public companies having staggered boards, shareholder votes are bullshit.

      In other words, institutional structure (the lack of any meaning of a shareholder vote) is the driver here. That is another reason this study is silly.

      Amar Bhide wrote about his in a 1994 Harvard Business Review article “Efficient Markets, Deficient Governance” which we’ve cited repeatedly. Bhide thinks equites should not be traded publicly, never before has such an ambiguous promise been traded on an anonymous, arm’s length basis. There are precedent for virtually every aspect of modern finance (LBOs, futures and options, subordinated debt) going back to the Bronze Age, but not anonymous, arm’s length trading of equity. Equity historically has been a venture capital/private equity type arrangement, with investors having some knowledge of and involvement in the management of companies, or being hangers on of a substantial block that played that role.

      1. Rick Cass

        Thank for the analysis for the financially impaired. One question. How many custodial agreements or street name holders have provisions allowing the custodians to vote? If there were such, would that change the conclusions? Thanks, Rick

        1. Nathanael

          Um, to clarify, mutual fund managers, pension fund managers, and the like still vote shares. But brokers don’t.

  5. avgJohn

    I don’t think it takes a majority interest for the elite to influence the economic policy and direction of this country.

    Swinging doors from investment banks to powerful bureaucratic positions such as the treasury dept and SEC., political leverage to influence agencies such as FASB and the SEC, lucrative contracts from the military industrial corporations headed by former generals and admirals, powerful social clubs such as the Chamber of Commerce, political favors and cronyism, greasing the right palms, member of the right clubs, retired congressional members lobbying and “making things happen” for the right price, inside information, and on and on. Yves has spelled it out quite clearly in past articles.

    Doesn’t have to be a secret cabal to run (ruin?) things, just a small group of elite with a shared common interest: Maintain the status quo at all costs. All with a small crowd of butt kissers and sycophants willing to sell out the rest of their fellow Americans for the proverbial 30 pieces of silver.

  6. Andrew Foland

    I’ll take Yves’ word for it that this is a badly flawed study (I simply don’t know enough to judge for myself.) But many good and useful studies started out earlier incarnations as flawed studies.

    I’ve never seen a study like this, and even if it’s flawed, it is an attempt to do something very interesting. I strongly suggest Yves write up, succintly and clearly, how the study could be improved, and send an email to the authors.

    1. Yves Smith Post author

      You can’t get the data to do this study correctly. Too many funds, too little reporting (none of these institutions has to report in the right detail, the disclosure regimes vary by country), no one will break out what they hold in custody.

      You might do some very soft proxies with qualitative data, but the authors are physicists. They want to apply their network methodology to a large data set with lots of nodes. So they will be utterly unreceptive to the notion that the data they used is bad and their study is bunk.

      This is classic drunk under the streetlight behavior.

      1. Rick Cass

        Essentially, then, the study design cannot prove the conclusion stated. However, that does not mean that the conclusion is not true, it is just presently unproven for lack of data. It may be that the opaque quality of the reporting and record keeping is just what allows control by a relative few. Less than 10% of voting stock can support control of a corporation in some instances.

        1. NewAlgier

          Dude, you’re missing the point. Registered ownership is completely different from beneficial ownership. Even the IRS can’t figure out who’s the beneficial owner of a bank account in Canada, say, which is one of the easiest assets to mark in the world. That’s why they make us fill out those goddamned FBARs.

          I bought shares in a private company and then sold half to my friend. We didn’t register it because it’s a pain in the ass. I send him his share of the dividends every year. He can vote his proxy if he wants, I’ll put it in for him (nobody ever does). This is the type of relationship that Yves is talking about. It looks like I own 100 shares, but I actually own and control only 50.

          And if I don’t like a public company’s management, am I really going to fly to the shareholders’ meeting and look like a gimp competing for attention against all the morons that such a forum attracts? No, I’m going to hit the sell button.

          Wealth concentration is a serious issue in America today. One could argue that 80% marginal tax rates can solve the problem. Or confiscation. Or rampant inflation. (These are all solutions that I find stupid, by the way, but they can be reasonably argued). This paper is just inarguably garbage.

  7. Kevin Murphy

    This is a big weakness in index funds. They are agnostic so they do not hold management accountable. Of course, most actively managed funds probably don’t care either.

  8. TC

    My issue with the study is that they didn’t name names! What are the 147 companies in this “cabal”? I bet you if they published the names of these companies we would be severely underwhelmed. I wouldn’t be shocked if 90% were 130 of the world’s largest hedge funds.

    1. Yves Smith Post author

      They did name names. Barclays is number one.
      Capital Group Companies is #2.
      Fidelity is #3 (Fidelity also had a big trading operation for smaller hedgies, I’d bet this data is co-mingled, but their own funds are big enough that this is probalby rounding error).
      Axa is #4.
      #5 State Street (a huge indexer, also a big custodian/clearer)
      #6 JPM (it has a huge clearing and settlement operation, again another tell the study is BS)
      #7 Legal and General
      #8 Vanguard
      #9 UBS
      #10 Merrill

      1. Andrei

        Now look how much voting control is concentrated with Vanguard
        Capital Group Companies & Fidelity especially through their significant voting control in JPM, Barclays, AXA. It will become way more interesting if one subtracts the amount of shares held by custodians that never get voted. Even more interesting none has a good clue as to who controls
        at least 2 of those 3. 2 are privately held and Vanguard has very interesting structure and bylaws.

  9. thedukeofurl

    It should no longer be surprising that some physicists think they can appropriately analyze data in a field they do not understand. They seem to think that the mathematical modeling they engage in will do their thinking and understanding for them. And many of them are not even aware of Mandelbrot’s work on the stock market, which has been around more than long enough for them to be acquainted with it. Schade.

    1. Skippy

      One might decry a flawed empirical search due to lack of data (markets are dark for a reason…eh), although mathematicians and physicists only seek to remove emotionality (hard task observer / observed thingy) in a field (more like multidimensional construct, built from the top down, over many generations), and whilst I respect Mandelbrots body of work…it is not definitive.

      Skippy…complexity is just another word for I / ME / WE / DON’T KNOW…YET.

  10. aeolius

    I think you are shooting from the hip on this one.
    First Isuggest you spend just a little time looking at the research university which is ETH Zurich.It seems committed to cross-discipline research.. You might be surprised.

    Second I suggest that you look at the CV’s of the three authors

    Finally do you think in Zurich that anything related to finance would not attract the notice of Gnomes?
    Perhaps you might better email your criticism to the lead author, Dottoressa Vitali and see how she might answer your critique.

  11. ChrisPacific

    I admit to jumping on the index fund bandwagon. It struck me as a nice way to guarantee ‘average’ returns while avoiding the pitfalls of hubris. (I may be ignorant about investing, but at least I acknowledge that fact and plan around it – most of the biggest losses in the market are made by ignorant people who think they are smart). I couldn’t do badly in the long run unless the market as a whole did, and I hoped that the powers that be would not let that happen – a position I’ve had some cause to reconsider since becoming a Naked Capitalism reader.

    I would love to invest in a good actively managed/activist fund if the expenses of said fund could be kept at a non-exploitative level. There are some positive signs in this regard – some companies (Fidelity springs to mind) offer actively managed funds with expenses not all that far above index fund levels. Historically though, most institutionalized/401(k) investing is a racket – it’s all about how much blood you can extract from the patient without killing them. One particularly predatory specimen I can recall did not offer any passively managed index funds in their plan, but decided to add one in response to demand. The expense ratio was a hair under 2%.

    1. Maju

      A bit more briefly than I replied in my own blog. The whole issue seems then to be about the reliability of the Orbis database as true stockholders or mere middlemen (brokers and such).

      I’d really appreciate a clarification from anyone knowledgeable: it is the keystone.

      1. james

        You could always call them up and ask. A lot of effort goes into their products, which are quite expensive and, as far as I am aware of, used by re-insurances and banks.

          1. Maju

            The Orbis databank claims to be accurate, it seems. This may be an undue claim or not. I’d like to know if Yves still stands by her criticism of the data (the alleged “garbage in”) or is willing to make a correction on that stand.

            I mean: Orbis can be wrong but so can the Smiths, right?

            For me this is very important because if your topology or the power structures through the economical network is correct, then it is a most valuable work and something we all should study to the detail. If it’s wrong, then obviously not.

            Do we have “garbage in” or “gold in”, so to say? Or something in between?

    2. NewAlgier

      Good of you to post here.

      You are still wrong. We talked about clearing and settlement arms, and your rebuttal starts talking about mutual funds. Mutual funds are beneficial owners and have true control. They talk to managers, they want to inform policy. Actively managed funds maintain teams of experts to monitor their investments. They hold management to account. This is not the problem with your study: Fidelity is both a registered and beneficial owner. (Of course, it’s so big that it has to own everything anyway. If you can’t sell, you can’t actually exercise real control).

      The problem are the Vanguards of the world, who make enough fees to pay for their IT infrastructure and a few gnomes and advertising and that’s it. Vanguard looks like a mutual fund, hell it calls itself one, but it’s not! It’s an indexer! Bogle will never call the president of Exxon and Tillerson won’t take his call because Bogle will sell only enough to match the index, regardless of what Tillerson is doing with the company.

      The other problem is JPM, who is just holding shares in trust for the real owner, who might be David Tepper or who might be grandma. If Tepper calls Tillerson, Tillerson is taking the call. That doesn’t show up in your data and never will, because you seem to think that JPM is making the decisions.

      One member of your team is an economist. Bully. Doesn’t mean that any of you understand the hardest and most forgotten part of finance: clearing and settlement.

      Oh, and I understand interdisciplinary work. I’m an engineer.

      1. james

        I love opening sentences like “You are still wrong”. Oh, I’m sorry, how did I miss that. But thanks for pointing it out to me, I’ll just go away now;-)

        Perhaps it was not appreciated in my response (as you claim “your rebuttal starts talking about mutual funds”), that you can analyze ownership networks for quite a while without bothering about control. You know, the topology part and what one could expect based on the economics literature. The fact that ownership is an objective quantity and does not need to be inferred from something else, as in the case of control. Older studies have done that as well, albeit at national level (for instance, Kogut and Walker 2001, Corrado and Zollo 2006).

        In my response I also gave references where some of the problems of control are discussed, and tried to take a step back by mentioning the potential control thing. Also, in Chapter 6.2.1 of there are many references pointing to published articles in the economics literature, where the authors are quite happy to infer control from ownership relations.

        Anyway, the paper is under review and if it is published, you will have to:
        A.) tell the reviewers (allegedly experts in the field) that they are wrong and the paper is in fact crap;
        B.) publish your own paper where you enlighten us about “the hardest and most forgotten part of finance: clearing and settlement” and show that the whole idea of control is flawed (references to published articles would always help).

        Oh, and please excuse my us of sarcasm in the economists vs. physicists issue. It was about the appeal to authority I kept seeing which I found got a bit tiring after a while…

        All the best,

        1. Nathanael

          You didn’t even respond to the criticism substantively.

          Try reading the parent comment again.

          Your paper is really hopelessly flawed. Try again.

          1. Maju

            He did reply to me just above, Nathanael. He replied with this brochure by the providers of the data that seems to “guarantee” knowledge of stuff like:

            · Direct and indirect ownership
            · Ultimate owner

            Basically you and others are saying that what Orbis promises is BS and that, therefore, James and the other authors are wrong (even if just because they are victims of a scam by this company). But is Orbis wrong (exaggerated claims in their publicity) or are you and Yves the ones wrong in this case? I think that clarifying this really merits a good discussion in depth or sample research if possible.

          2. james

            Please excuse my continued inability to get my points across and hence having to be overly repetitive.

            A.) The study is not just about control, is is also about the global ownership network topology and unveils novel, undocumented patterns, which could be of potential interest.

            B.) Regarding control, I repeatedly referred the interested reader to Chapter 6.2 of of where I explicitly address often voiced concerns and common misconceptions of our work, such as:
            “but control cannot really be assessed from ownership”, “comparing ownership, and hence control, in different countries is like comparing apples with oranges” and “but funds don’t exert control”.

            I should apologize for being too lazy to reiterate everything here again.

            Oh, and thank you for your valuable insights and encouraging words…

        2. NewAlgier

          “ can analyze ownership networks for quite a while without bothering about control.”

          You are right, I do not understand this at all. Ownership, in the standard common and legal definition, infers control. I mean, sure, you can analyze registered ownership until the cows come home, but it’s a complete waste of time. The registry has no information regarding who’s making the decision.

          Isn’t an appeal to an expert referee an appeal to authority as well? Just because I’m paid to advise investors, and therefore won’t be putting my knowledge in the public domain, doesn’t mean that I don’t know what I’m talking about.

  12. Tom Edwards

    Since the vast majority of stockholders have no idea what they’re doing, so hand their money over to professional managers in some form or other, change “ownership” of the stock to “control” of the stock, then look at the clear message of intense concentration of power this study’s findings illuminates. Then consider the enormous risk across the range of asymmetric outcomes such a structure of control implies, from a clear structural tendency towards outright fascism to sudden, total collapse should a primary “node” for any reason be “off-line” for even days.

    Your analysis describes the race from the perspective of the knee, not the runner.

  13. aeolius

    Thank you for being interested in this area, for the study and for the clarifications in your blog. I do not thank you for using math that makes me feel powerless and not in control of understanding an area I am used to feeling comfortable in. Data phones have been quite enough thank you

    The separation of the notions of control and of power is vital.Boards of Directors seldom have control via majority ownership. But they do have long-term power over the activities of the corporation. Is this difference made clear in your paper.
    Also I do wonder if a similar network analysis of interlocking directors has been done?

    1. james

      Dear aeolius,

      Actually, math often makes things less ambiguous;-)

      Again, I would like to stress the fact that the study is not just about computing control, it’s also about a novel and huge network analysis of the global ownership topology, unveiling features missing in the pertinent literature (regardless how obvious some people find the results). Also, the notion of control is a tentative one, and should be understood as a proxy. As Gerald Davis of the University of Michigan put it: “the analysis serves more as an impression of the moon’s surface you get with a telescope. It’s not a street map.” So the study is perhaps best understood as a necessary first step in untangling the global ownership and control structures. Please consult Chapter 6.2 of for a detailed discussion and references to the economics literature related to the issues of ownership and control.

      I am not aware of a study of interlocking directorates at this level. However, the study of Santos and Rumble in the Journal of Financial Economics (2006) reports that bankers are more likely to join the corporate board of a firm in which their bank holding company controls a large voting stake.


  14. james


    Dear authors and readers of Naked Capitalism,

    Thank you for your interest in our study. To cut a long discussion short, please let me take a step back and focus on some general issues.

    I understand that you categorically disprove of the value of economic network analysis. Although I don’t think the fierce and hostile tone this sentiment was often expressed in was really appropriate, I am fine with that opinion. Especially as this kind of analysis represents a new paradigm in dealing with complex systems and vast amounts of data. (However, other people have thought that network analysis of economic data has been worth their time, see for instance the chapter:
    “The Structure of Financial Networks” in Springer’s “Network Science: Complexity in Nature and Technology”.)

    The mentioned study is currently in the peer-reviewing process for it to be accepted for publication. This not only means that the journal chooses independent (anonymous) reviewers it thinks fit for the job (yes, the experts who should find all the flaws in a paper), but, crucially, that every claim we make we had to try and back with understanding found in the scholarly literature. For what it’s worth, this is the academic game to play if you want to publish studies. But this is also where an objective discourse can begin.

    I don’t want to be condescending when I allege that what is being expressed here are just opinions. But without the same rigor in argumentation, i.e., pointing to studies backing ones claims with existing knowledge, the whole discussion just becomes an endless string of assertions. Of course, one can always claim that this focus on published studies is one of the things that is wrong with academia and its ivory towers…

    The bottom line:

    A.) Please, for 1 minute, just forget that the notion of control even exists! This was the main focus of all the critique. So we are now simply talking about ownership networks. This begs the question: why bother?

    Some scholars have noted, that ownership networks can be understood to exhibit (the references can be found in
    “the historical bargains struck by labor, the state and holders of capital regarding who gets to own and control the economic assets.” (Kogut and Walker, 2001)

    That, their study has implications for individual firms:
    “A network of ownership ties represents a unique opportunity to examine how an economy-wide structure of relations affects individual firm diversification events.” (Kogut and Walker, 1999)
    “The relationship of capital to the firm is also shaped by the structure of interfirm networks, which influences firm behavior through access to critical resources and information.” (Aguilera and Jackson, 2003)

    Finally, they are relevant for policymakers:
    “The analysis of networks of business enterprises has grown to be one of the leading perspectives in the study of business policy, organizational behavior, and public economic policy.” (Corrado Zollo, 2006)

    Analyzing (national) ownership networks has been done before:
    -B. Kogut and G.n Walker, “The Small World of Germany and the Durability of National Networks”, American Sociological Review, 2001
    -R. Corrado and M. Zollo, “Small worlds evolving: governance reforms, privatizations, and ownership networks in Italy”, Industrial and Corporate Change, 2006

    With our study, we add more sophistication in the methods and extend the scope. And indeed, we find the novel features I mentioned many times not documented in the existing literature (this is a main criterion for a study to be published in a journal).

    B.) So, let’s look at control now.

    There is an extensive body of literature in economics on the issue of control and ownership, which does, in no way, give such a clear cut picture some people here would like to imply and the whole discussion is a lot more complex (again, the references can be found in For instance:
    (Brioschi et al., 1989; La Porta et al., 1998, 1999; Claessens and Djankov, 2000; Nenova, 2003; Chapelle and Szafarz, 2005; Chapelle, 2005; The Deminor Group, 2005; Almeida and Wolfenzon, 2006; Almeida et al., 2007). Some of the mentioned authors infer control from ownership using the same models as the study under scrutiny. Others discuss the role of mutual funds:
    (Santos and Rumble, 2006; Davis and Kim, 2007; Davis, 2008).

    With respect to control, the claim of the study is simple: it is a first approximation of (potential) global control structures. And its distribution turns out to be unprecedentedly skewed (hello conspiracy theory camp;-).

    C.) The study only claims to have opened the door to further discussions. “This remarkable finding raises at least two questions that are fundamental to the understanding of the functioning of the global economy”: global market competition and global financial systemic risk. To what extent this is really relevant and the control approximation is true, is, of course, up for discussion. But we believe this to be a valuable and fruitful starting point for further research.

    So, to be honest, I don’t really get the whole fuss that’s being made here and the general sense of animosity.

    Finally, without wanting to sound patronizing, Ms. Smith should be aware that she is offering her opinions and not “the truth”, and hence it is maybe not very pertinent when she writes sentences like “I pre-debunked a report on an earlier version of this paper”, “this paper is a garbage-in, garbage out analysis”, “you might do some very soft proxies with qualitative data, but the authors are physicists”. But then again, in a blog post such utterances help make a gripping read;-)

    Anyway, all the best,

    1. james

      By the way, is it only me who finds the following statement Ms. Smith wrote in a reply to a reader in the comment section to be a bit ironic?

      “You are exhibiting a classic, well documented cognitive bias. When people are presented with data that conflicts with existing prejudices, many reject the data and become more confident in their prejudice.”

      The Boston Globe writes to following in an article about this:
      “‘The general idea is that it’s absolutely threatening to admit you’re wrong,’ says political scientist Brendan Nyhan, the lead researcher on the Michigan study. The phenomenon – known as ‘backfire’ – is ‘a natural defense mechanism to avoid that cognitive dissonance.'”

      I also like this cognitive bias;-)
      “What do people do when confronted with scientific evidence that challenges their pre-existing view? Often they will try to ignore it, intimidate it, buy it off, sue it for libel or reason it away.”

      1. Maju

        I think that after such a demolishing criticism as this entry makes, the less she could have done is engaging more with you and your arguments. It is a scientific matter after all and if we can’t agree, we can at least agree on what exactly we disagree about.

        I have already pointed out that the key issue seems to be the Orbis database, i.e. whether the data is “garbage in” or “gold in” or something in between.

  15. james

    Could it be that your blog is slightly broken? Clicking the URL to this page (in different browsers running on different operating systems) I usually only see a “No Comments” link at the end of the post. This link then actually does reveal all the comments…

  16. D Metalious

    Why the emotion? You raise some interesting points about the possible limits of this analysis. That’s all good. I don’t get why you’re so hostile in doing so though.

Comments are closed.