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Capital Markets, Ownership and Distance

  • Wendy Carlin
  • Andrew Charlton
  • Colin Mayer

This 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 standalone 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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File URL: http://cep.lse.ac.uk/pubs/download/dp0744.pdf
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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
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA.
  2. Andrew B. Bernard & Fredrik Sjoholm, 2003. "Foreign Owners and Plant Survival," NBER Working Papers 10039, National Bureau of Economic Research, Inc.
  3. 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.
  4. Claudia M. Buch, 2005. "Distance and International Banking," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 787-804, 09.
  5. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
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