Capital Markets, Ownership and Distance

Wendy Carlin (), Andrew Charlton and Colin Mayer ()

No 5764, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: F21 G31 (search for similar items in EconPapers)
Date: 2006-07
New Economics Papers: this item is included in nep-fin and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Capital Markets, Ownership and Distance (2006)
Working Paper: Capital markets, ownership and distance (2006)
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