Backbone of Complex Networks of Corporations - The Flow of Control [2009.02.08]

e wrote:

Backbone of complex networks of corporations: The flow of control
Authors: J.B. Glattfelder, S. Battiston
(Submitted on 5 Feb 2009 (v1), last revised 21 Aug 2009 (this version, v2))

Abstract: We present a methodology to extract the backbone of complex networks based on the weight and direction of links, as well as on nontopological properties of nodes. We show how the methodology can be applied in general to networks in which mass or energy is flowing along the links. In particular, the procedure enables us to address important questions in economics, namely, how control and wealth are structured and concentrated across national markets. We report on the first cross-country investigation of ownership networks, focusing on the stock markets of 48 countries around the world. On the one hand, our analysis confirms results expected on the basis of the literature on corporate control, namely, that in Anglo-Saxon countries control tends to be dispersed among numerous shareholders. On the other hand, it also reveals that in the same countries, control is found to be highly concentrated at the global level, namely, lying in the hands of very few important shareholders. Interestingly, the exact opposite is observed for European countries. These results have previously not been reported as they are not observable without the kind of network analysis developed here.

Comments: 24 pages, 12 figures, 2nd version (text made more concise and readable, results unchanged)
Subjects: General Finance (q-fin.GN); Physics and Society (physics.soc-ph)
Journal reference: Phys. Rev. E 80, 036104 (2009)
DOI: 10.1103/PhysRevE.80.036104
Cite as: arXiv:0902.0878v2 [q-fin.GN]
Submission history
From: James Glattfelder B [view email]
[v1] Thu, 5 Feb 2009 10:53:52 GMT (995kb)
[v2] Fri, 21 Aug 2009 12:35:41 GMT (688kb)

http://arxiv.org/abs/0902.0878

Document Source URL
http://arxiv.org/PS_cache/arxiv/pdf/0902/0902.0878v2.pdf

Research and Analysis Data Source

Bureau van Dijk’s ORBIS database
Orbis covers approaching 65 million companies around the world
http://www.bvdinfo.com/Products/Company-Information/International/ORBIS....

e wrote:

World's Stocks Controlled by Select Few
By Lauren Schenkman, Inside Science News Service
posted: 26 August 2009 11:13 am ET

WASHINGTON -- 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.

"It's clear, looking at financial contagion and recent crises, that understanding interrelations between companies and holdings is very important in the future,” he said. "Certainly people have some understanding of how large some of these financial institutions in the world are, there's some feeling of how intertwined they are, but there's a big difference between having an impression and actually having ... more explicit numbers to put behind it."

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.

The results raise questions of where and when a company could choose to exert this influence, but Glattfelder and Battiston are reluctant to speculate.

"In this kind of science, complex systems, you're not aiming at making predictions [like] ... where the tennis ball will be at given place in given time," Battiston said. “What you're trying to estimate is ... the potential influence that [an investor] has."

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.

Inside Science News Service is supported by the American Institute of Physics.

http://www.livescience.com/culture/090826-stock-market.html