Capital Markets, Ownership and Distance
AbstractThis paper uses a new data-set to examine how internal capital markets and foreign ownership affect investment. Our data allow us to compare investment behaviour of listed subsidiaries with stand-alone firms while controlling for investment opportunities of parent and subsidiary firms. We evaluate how the size of ownership and the geographical proximity of majority owners to their subsidiaries affect firm investment efficiency. We find that the investment of subsidiaries is more sensitive to investment opportunities than that of standalone firms and falls when investment opportunities of parent firms improve. This suggests that there are internal capital markets that reallocate funds towards units with better investment opportunities. We find that investment allocation is most efficient where parents have modest ownership stakes and are distant from their subsidiaries and when subsidiaries operate in well developed financial markets. These results indicate that influence costs imposed by dominant parents may outweigh their potential informational benefits, especially when subsidiaries are located in countries with weaker financial development.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0744.
Date of creation: Aug 2006
Date of revision:
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Investment; Internal Capital Markets; Foreign Ownership;
Other versions of this item:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ACC-2006-12-22 (Accounting & Auditing)
- NEP-ALL-2006-12-22 (All new papers)
- NEP-BEC-2006-12-22 (Business Economics)
- NEP-CFN-2006-12-22 (Corporate Finance)
- NEP-FMK-2006-12-22 (Financial Markets)
- NEP-PKE-2006-12-22 (Post Keynesian Economics)
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