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Multinationals Do It Better: Evidence on the Efficiency of Corporations’ Capital Budgeting

  • William H. Greene

    ()

    (Stern School of Business, New York University)

  • Abigail S. Hornstein

    ()

    (Department of Economics, Wesleyan University)

  • Lawrence J. White

    ()

    (Stern School of Business, New York University)

  • Bernard Yeung

    ()

    (Stern School of Business, New York University)

This paper examines the effectiveness of multinational enterprises’ capital budgeting decisions as compared to the decisions of purely domestic enterprises. This is an important question because of multinationals’ role in allocating capital globally. Answering this question may also shed light on whether multinationals are indeed better managed than are purely domestic firms. We examine this question empirically using the deviation of a firm’s estimated marginal Tobin’s q from an appropriate benchmark as an indicator of effective resource allocation. We find that multinationals make more efficient capital budgeting decisions than do purely domestic firms. The result stems from multinational enterprises’ exercising greater restraint on over-investment, but is not due to looser liquidity constraints. In obtaining the result, we account for the impact of institutional ownership, managerial ownership, and managerial entrenchment. We also test whether multinationals’ greater capital budgeting efficiency might be due to their investment locations, since they might thereby be monitored by more agents and also may be more successful in resisting pressures from special interest groups and governments to adopt practices that are not consistent with firm value maximization. We do not find support for the monitoring and bargaining hypotheses. Our observations therefore suggest that multinationals may be intrinsically better managed firms than are purely domestic firms.

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Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-012.

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Length: 51 pages
Date of creation: Mar 2006
Publication status: Published in the Journal of Empirical Finance (Volume 16, Issue 5 , December 2009, Pages 703-720)
Handle: RePEc:wes:weswpa:2006-012
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