External Governance and Internal Resource Allocation
45 Pages Posted: 27 Feb 2017 Last revised: 5 Jul 2019
Date Written: April 4, 2019
Internal capital markets are important determinants of investment and economic growth in the modern economy. We exploit a regulatory experiment on short selling restrictions and microdata on multinationals’ foreign operations to test whether external governance pressure from short selling disciplines internal resource allocation. Firms treated with short selling pressure shift 30% more capital toward foreign subsidiaries with strong recent performance. Subsidiaries that receive capital experience no subsequent decline in productivity, suggesting the reallocation may be productive. Our results provide new evidence on the scope and potential benefits of short selling and the importance of cross-border spillovers of capital markets regulation.
Keywords: external governance, investment, internal capital markets
JEL Classification: D22, G23, G28, G34, M5
Suggested Citation: Suggested Citation