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Ownership, Economic Entrenchment and Allocation of Capital

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Listed author(s):
  • 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)

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

Other versions of this item:

Find related papers by JEL classification:
  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
  • P00 - Economic Systems - - General - - - General

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  1. Per-Olof Bjuggren & Johan Eklund & Daniel Wiberg, 2007. "Ownership structure, control and firm performance: the effects of vote-differentiated shares," Applied Financial Economics, Taylor & Francis Journals, vol. 17(16), pages 1323-1334.
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Cited by:

  1. Sameeksha Desai, 2011. "Pro-market reforms and allocation of capital in India," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(2), pages 123-139, May.

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