Corporate Governance and Internal Capital Markets
Frankfurt School of Finance & Management gemeinnützige GmbH
New York University (NYU) - Leonard N. Stern School of Business
Harvard Business School Finance Working Paper No. 1530565
AFA 2011 Denver Meetings Paper
We exploit an exogenous shock to corporate ownership structures created by a recent tax reform in Germany to explore the link between corporate governance and internal capital markets. We find that firms with more concentrated ownership are less diversified and have more efficient internal capital markets. Our findings provide direct evidence in support of Scharfstein and Stein’s (2000) model, which suggests that internal capital misallocations are partly a result of poor corporate governance. We also provide evidence of a channel through which the benefits of ownership concentration outweigh its costs.
Number of Pages in PDF File: 47
Keywords: Corporate governance, internal capital markets, ownership, diversification
JEL Classification: G31, G32, G34
Date posted: January 3, 2010 ; Last revised: June 7, 2010
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