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Multinationals Do It Better: Evidence on the Efficiency of Corporations’ Capital Budgeting

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Author Info

  • William H. Greene

    ()
    (Stern School of Business, New York University)

  • Abigail S. Hornstein

    ()
    (Department of Economics, Wesleyan University)

  • Lawrence J. White

    ()
    (Stern School of Business, New York University)

  • Bernard Yeung

    ()
    (Stern School of Business, New York University)

Abstract

This paper examines the effectiveness of multinational enterprises’ capital budgeting decisions as compared to the decisions of purely domestic enterprises. This is an important question because of multinationals’ role in allocating capital globally. Answering this question may also shed light on whether multinationals are indeed better managed than are purely domestic firms. We examine this question empirically using the deviation of a firm’s estimated marginal Tobin’s q from an appropriate benchmark as an indicator of effective resource allocation. We find that multinationals make more efficient capital budgeting decisions than do purely domestic firms. The result stems from multinational enterprises’ exercising greater restraint on over-investment, but is not due to looser liquidity constraints. In obtaining the result, we account for the impact of institutional ownership, managerial ownership, and managerial entrenchment. We also test whether multinationals’ greater capital budgeting efficiency might be due to their investment locations, since they might thereby be monitored by more agents and also may be more successful in resisting pressures from special interest groups and governments to adopt practices that are not consistent with firm value maximization. We do not find support for the monitoring and bargaining hypotheses. Our observations therefore suggest that multinationals may be intrinsically better managed firms than are purely domestic firms.

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Bibliographic Info

Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-012.

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Length: 51 pages
Date of creation: Mar 2006
Date of revision:
Publication status: Published in the Journal of Empirical Finance (Volume 16, Issue 5 , December 2009, Pages 703-720)
Handle: RePEc:wes:weswpa:2006-012

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Keywords: multinational corporations; capital budgeting; corporate efficiency;

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References

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Citations

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Cited by:
  1. Abigail S. Hornstein & Minyuan Zhao, 2009. "Corporate Capital Budgeting Decisions and Information Sharing," Wesleyan Economics Working Papers 2009-005, Wesleyan University, Department of Economics.
  2. Siegel, Jordan I. & Licht, Amir N. & Schwartz, Shalom H., 2011. "Egalitarianism and international investment," Journal of Financial Economics, Elsevier, vol. 102(3), pages 621-642.
  3. Danilo Coelho & Marcelo Fernandes e Miguel N. Foguel, 2009. "Capital Estrangeiro e Diferenciais de Gênero nas Promoções: Evidências da Indústria de Transformação Brasileira," Discussion Papers 1447, Instituto de Pesquisa Econômica Aplicada - IPEA.
  4. Danilo Coelho & Marcelo Fernandes & Miguel Nathan Foguel, 2007. "Foreign Capital And Gender Differences In Promotions: Evidence From The Brazilian Transformation Industry," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 167, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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