Aug 25, 2009
By Lauren Schenkman
Inside Science News Service
http://www.insidescience.org/research/study_says_world_s_stocks_controlled_by_select_few
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.