Capital Markets, Ownership and Distance

40 Pages Posted: 19 Sep 2006

See all articles by Wendy Carlin

Wendy Carlin

University College London - Department of Economics; Centre for Economic Policy Research (CEPR)

Andrew Charlton

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Colin Mayer

University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: July 2006

Abstract

This paper uses a new data-set to examine how internal capital markets and foreign ownership affect investment. Our data allow us to compare investment behaviour of listed subsidiaries with stand-alone firms while controlling for investment opportunities of parent and subsidiary firms. We evaluate how the size of ownership and the geographical proximity of majority owners to their subsidiaries affect firm investment efficiency. We find that the investment of subsidiaries is more sensitive to investment opportunities than that of stand-alone firms and falls when investment opportunities of parent firms improve. This suggests that there are internal capital markets that reallocate funds towards units with better investment opportunities. We find that investment allocation is most efficient where parents have modest ownership stakes and are distant from their subsidiaries and when subsidiaries operate in well developed financial markets. These results indicate that influence costs imposed by dominant parents may outweigh their potential informational benefits, especially when subsidiaries are located in countries with weaker financial development.

Keywords: Investment, internal capital markets, foreign ownership

JEL Classification: F21, G31

Suggested Citation

Carlin, Wendy and Charlton, Andrew and Mayer, Colin, Capital Markets, Ownership and Distance (July 2006). CEPR Discussion Paper No. 5764, Available at SSRN: https://ssrn.com/abstract=931493

Wendy Carlin (Contact Author)

University College London - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Andrew Charlton

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

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United Kingdom

Colin Mayer

University of Oxford - Said Business School ( email )

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Oxford, OX1 1HP
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Centre for Economic Policy Research (CEPR)

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United Kingdom

European Corporate Governance Institute (ECGI)

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