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Capital Markets, Ownership and Distance

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Author Info
Wendy Carlin
Andrew Charlton
Colin Mayer

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Abstract

This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.

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Publisher Info
Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0744.

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Date of creation: Aug 2006
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Handle: RePEc:cep:cepdps:dp0744

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Related research
Keywords: Investment; Internal Capital Markets; Foreign Ownership;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  2. Claudia M. Buch, 2001. "Distance and International Banking," Kiel Working Papers 1043, Kiel Institute for the World Economy. [Downloadable!]
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  3. Abel, Andrew B & Eberly, Janice C, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 581-93, October. [Downloadable!] (restricted)
    Other versions:
  4. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA. [Downloadable!]
    Other versions:
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