| By: |
Wendy Carlin;
Andrew Charlton;
Colin Mayer |
| Abstract: |
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. |
| Keywords: |
Investment, Internal Capital Markets, Foreign Ownership |
| JEL: |
F21 G31 |
| Date: |
2006–08 |
| URL: |
http://d.repec.org/n?u=RePEc:cep:cepdps:dp0744&r=pke |