Corporate Governance and Internal Capital Markets
47 Pages Posted: 3 Jan 2010 Last revised: 7 Jun 2010
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: Suggested Citation