Capital markets, ownership and distance
By: Wendy Carlin, Andrew Charlton and Colin Mayer
Contributors: Charlton, Andrew (Andrew Henry George), 1978-; Mayer, Colin; London School of Economics and Political Science. Centre for Economic Performance
Series: CEP discussion paper -- no. 744
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2006
Place of publication: London
Language: eng
Format: [electronic resource] /
Description: 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 standalone 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.
Notes: Title from PDF file (viewed on Sept. 29, 2006).

"August 2006."

Includes bibliographical references.

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