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Corporate Governance and the Efficiency of Internal Capital Markets

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  • I-Ju Chen

    (Yuan Ze University, College of Management, 135 Yuan-Tung Road, Chung-Li 32003, Taiwan)

Abstract

This study investigates whether the governance structure of a diversified firm affects its internal capital market and the associated investment efficiencies. We propose that managers of well-governed diversified firms are more subject to the disciplinary power of shareholders and thus are less likely to undertake the inefficient capital investment between divisions. We find that the small segment investment of well-governed diversified firms has less sensitivity with regard to cash flows, but is more sensitive to growth opportunities. Our empirical results suggest that governance mechanisms play an important role in capital allocation among divisions of diversified firms.

Suggested Citation

  • I-Ju Chen, 2016. "Corporate Governance and the Efficiency of Internal Capital Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-50, June.
    • Handle: RePEc:wsi:rpbfmp:v:19:y:2016:i:02:n:s0219091516500132
    DOI: 10.1142/S0219091516500132
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