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Multinationals Do It Better: Evidence on the Efficiency of Corporations Capital Budgeting

51 Pages Posted: 13 Oct 2008  

William H. Greene

New York University Stern School of Business

Abigail S. Hornstein

Leonard N. Stern School of Business - Department of Economics

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics

Bernard Yin Yeung

National University of Singapore - Business School

Date Written: March 2006

Abstract

This paper examines the effectiveness of multinational enterprises capital budgeting decisions as compared to the decisions of purely domestic enterprises. This is an important question because of multinationals role in allocating capital globally. Answering this question may also shed light on whether multinationals are indeed better managed than are purely domestic firms. We examine this question empirically using the deviation of a firm s estimated marginal Tobin s q from an appropriate benchmark as an indicator of effective resource allocation. We find that multinationals make more efficient capital budgeting decisions than do purely domestic firms. The result stems from multinational enterprises exercising greater restraint on over-investment, but is not due to looser liquidity constraints. In obtaining the result, we account for the impact of institutional ownership, managerial ownership, and managerial entrenchment. We also test whether multinationals greater capital budgeting efficiency might be due to their investment locations, since they might thereby be monitored by more agents and also may be more successful in resisting pressures from special interest groups and governments to adopt practices that are not consistent with firm value maximization. We do not find support for the monitoring and bargaining hypotheses. Our observations therefore suggest that multinationals may be intrinsically better managed firms than are purely domestic firms.

Suggested Citation

Greene, William H. and Hornstein, Abigail S. and White, Lawrence J. and Yeung, Bernard Yin, Multinationals Do It Better: Evidence on the Efficiency of Corporations Capital Budgeting (March 2006). NYU Working Paper No. EC-06-04. Available at SSRN: https://ssrn.com/abstract=1281948

William H. Greene (Contact Author)

New York University Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States
212-998-0876 (Phone)

HOME PAGE: http://people.stern.nyu.edu/wgreene

Abigail S. Hornstein

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Lawrence J. White

New York University (NYU) - Leonard N. Stern School of Business, Department of Economics ( email )

44 West 4th Street
New York, NY NY 10012
United States

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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