Corporate Governance and Internal Capital Markets

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

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH

Belen Villalonga

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

Date Written: January 2010

Abstract

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: https://ssrn.com/abstract=1530565 or http://dx.doi.org/10.2139/ssrn.1530565

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Belen Villalonga

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

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

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