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Ownership, Economic Entrenchment and Allocation of Capital

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  • Johan E. Eklund

    ()
    (Jönköping International Business School and The Royal Institute of Technology)

  • Sameeksha Desai

    (University of Missouri and Max Planck Institute of Economics)

Abstract

In an efficient economy, capital should be quickly (re)allocated from declining firms and sectors to more profitable investment opportunities. This process is affected by the concentration of corporate control, which in turn is affected by market institutions. We employ a panel of 12,000 firms across 44 countries to estimate the functional efficiency of capital markets. We adapt a measure for the efficiency of capital allocation using the accelerator principle. Our empirical results show weak property rights and highly concentrated ownership reduce the functional efficiency of capital markets. Findings support the economic entrenchment hypothesis but not the legal origins hypothesis.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2008-012.

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Date of creation: 25 Feb 2008
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Handle: RePEc:jrp:jrpwrp:2008-012

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Keywords: Allocation of capital; accelerator principle; ownership; functional efficiency; economic entrenchment;

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Cited by:
  1. Desai, Sameeksha & Eklund, Johan E. & Högberg, Andreas, 2009. "Promarket Reforms and Allocation of Capital in India," Ratio Working Papers 146, The Ratio Institute.

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