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Ownership, Economic Entrenchment and Allocation of Capital

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  • Desai, Sameeksha

    (University of Missouri and Max Planck Institute of Economics)

  • Eklund, Johan E.

    (Jönköping International Business School and The Royal Institute of Technology)

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.

Suggested Citation

  • Desai, Sameeksha & Eklund, Johan E., 2008. "Ownership, Economic Entrenchment and Allocation of Capital," Ratio Working Papers 120, The Ratio Institute.
    • Handle: RePEc:hhs:ratioi:0120
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    Cited by:

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

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    More about this item

    Keywords

    Allocation of capital; accelerator principle; ownership; functional efficiency; economic entrenchment;
    All these keywords.

    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 - Political Economy and Comparative Economic Systems - - General - - - General

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