External Governance and Internal Resource Allocation

45 Pages Posted: 27 Feb 2017 Last revised: 5 Jul 2019

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Andrew Bird

Carnegie Mellon University

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business

Thomas Ruchti

Carnegie Mellon University - David A. Tepper School of Business

Date Written: April 4, 2019

Abstract

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

Albertus, James F. and Bird, Andrew and Karolyi, Stephen A. and Ruchti, Thomas, External Governance and Internal Resource Allocation (April 4, 2019). Available at SSRN: https://ssrn.com/abstract=2923404 or http://dx.doi.org/10.2139/ssrn.2923404

James F. Albertus (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Andrew Bird

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Stephen A. Karolyi

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
4122682909 (Phone)

Thomas Ruchti

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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