Capital Markets, Ownership and Distance
This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.
|Year of publication:||
|Authors:||Carlin, Wendy ; Charlton, Andrew ; Mayer, Colin|
Centre for Economic Performance
|Type of publication:||Other|
Carlin, Wendy, Charlton, Andrew and Mayer, Colin (2006) Capital Markets, Ownership and Distance. Centre for Economic Performance, London School of Economics and Political Science.