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Ownership, Economic Entrenchment and Allocation of Capital

  • Eklund, Johan

    ()

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Desai, Sameeksha

    ()

    (University of Missouri and Max Planck Institute of Economics)

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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Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 123.

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Length: 38 pages
Date of creation: 02 Apr 2008
Date of revision:
Handle: RePEc:hhs:cesisp:0123
Contact details of provider: Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/

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