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 stand-alone 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5764.
Date of creation: Jul 2006
Date of revision:
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Other versions of this item:
- Wendy Carlin & Andrew Charlton & Colin Mayer, 2006. "Capital markets, ownership and distance," LSE Research Online Documents on Economics 19842, London School of Economics and Political Science, LSE Library.
- Wendy Carlin & Andrew Charlton & Colin Mayer, 2006. "Capital Markets, Ownership and Distance," CEP Discussion Papers dp0744, Centre for Economic Performance, LSE.
- 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-ALL-2006-10-28 (All new papers)
- NEP-FIN-2006-10-28 (Finance)
- NEP-PKE-2006-10-28 (Post Keynesian Economics)
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