The determinants of rent extraction in the parent-subsidiary relation

A recurring problem in financial development is to understand which poor quality institutions lead to substantial rent extraction by controllers. When rent extraction is high and its extent difficult to predict, outside investment in firms may decline. Recent work has emphasised the quality of the legal system and the overall quality of political institutions as explaining the degree to which rent extraction can occur. Here we exploit a comprehensive parent-subsidiary data-set to shed light on these questions. Using the relation between parent and subsidiary Tobin's Q to measure the extent of parent companies' rent extraction from partially-owned subsidiaries, the results indicate that governmental quality, legal origin, rules on self-dealing and political stability all predict the degree of rent extraction.