- Corporate governance and internal capital markets
- Number of pages
- Amsterdam: Faculteit Economie en Bedrijfskunde
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We exploit an exogenous shock to corporate ownership structures created by a recent tax reform in Germany to explore the causal link between corporate governance and internal capital markets. We find that firms with more concentrated ownership are less diversified and have a less active but more efficient internal capital market. 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.
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