Corporate Governance and Internal Capital Markets

47 Pages Posted: 3 Jan 2010 Last revised: 7 Jun 2010

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Belen Villalonga

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

Date Written: January 2010


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.

Keywords: Corporate governance, internal capital markets, ownership, diversification

JEL Classification: G31, G32, G34

Suggested Citation

Sautner, Zacharias and Villalonga, Belen, Corporate Governance and Internal Capital Markets (January 2010). Harvard Business School Finance Working Paper No. 1530565, AFA 2011 Denver Meetings Paper, Available at SSRN: or

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Belen Villalonga

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

40 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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