Advertisement

Review of Managerial Science

, Volume 13, Issue 1, pp 93–111 | Cite as

Strong shareholder rights, internal capital allocation efficiency, and the moderating role of market competition and external financing needs

  • Maximilian SturmEmail author
  • Stephan Nüesch
Original Paper
  • 214 Downloads

Abstract

This study investigates the effect of strong shareholder rights on the internal capital allocation efficiency of multi-segment firms and how market competition and the firm’s need for external financing moderate this association. For this purpose, we use panel data from North American multi-segment firms covering the years 1998 through 2006 with dynamic firm fixed effect models, which enable us to control for unobserved and time-invariant firm heterogeneity as well as for a dynamic nature of the internal capital allocation process. We confirm previous findings of Chen and Chen (J Bank Finance 36(2):395–409, 2012) and show that strong shareholder rights significantly increase the internal capital allocation efficiency. Further, we find that market competition moderates this association by significantly weakening this positive effect. However, the moderating effect of external financing needs is not found to be significant. These findings indicate that strong shareholder rights are crucial for ensuring efficient internal capital allocations within multi-segment firms, especially when market competition is low.

Keywords

Corporate governance Internal capital allocation efficiency External financing needs Market competition Multi-segment firms 

JEL Classification

G11 G14 G31 D82 

References

  1. Aguilera RV, Filatotchev I, Gospel H, Jackson G (2008) An organizational approach to comparative corporate governance: costs, contingencies, and complementarities. Organ Sci 19(3):475–492Google Scholar
  2. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297Google Scholar
  3. Arrfelt M, Wiseman RM, McNamara G, Hult GTM (2014) Examining a key corporate role: the influence of capital allocation competency on business unit performance. Strateg Manag J 36(7):1017–1034Google Scholar
  4. Bebchuk LA (2005) The case for increasing shareholder power. Harv Law Rev 118(3):833–914Google Scholar
  5. Bebchuk LA (2007) The myth of the shareholder franchise. Va Law Rev 93(3):675–732Google Scholar
  6. Bebchuk LA, Coates JC, Subramanian G (2002) The powerful antitakeover force of staggered boards: theory, evidence, and policy. Stanf Law Rev 54(5):887–951Google Scholar
  7. Bebchuk LA, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financ Stud 22(2):783–827Google Scholar
  8. Berger PG, Hann R (2003) The impact of SFAS No. 131 on information and monitoring. J Account Res 41(2):163–223Google Scholar
  9. Berger PG, Ofek E (1995) Diversification’s effect on firm value. J Financ Econ 37(1):39–65Google Scholar
  10. Bhagat S, Bolton B (2008) Corporate governance and firm performance. J Corp Finance 14(3):257–273Google Scholar
  11. Billett MT, Mauer DC (2003) Cross-subsidies, external financing constraints, and the contribution of the internal capital market to firm value. Rev Financ Stud 16(4):1167–1201Google Scholar
  12. Bower JL (1986) Managing the resource allocation process: a study of corporate planning and investment. Harvard Business School Press, BostonGoogle Scholar
  13. Chae J, Kim S, Lee EJ (2009) How corporate governance affects payout policy under agency problems and external financing constraints. J Bank Finance 33(11):2093–2101Google Scholar
  14. Chen SS, Chen I (2012) Corporate governance and capital allocations of diversified firms. J Bank Finance 36(2):395–409Google Scholar
  15. Chen KCW, Chen Z, Wei KCJ (2011) Agency costs of free cash flow and the effect of shareholder rights on the implied cost of equity capital. J Financ Quant Anal 46(1):171–207Google Scholar
  16. Cleary S (1999) The relationship between firm investment and financial status. J Finance 54(2):673–692Google Scholar
  17. Davis JH, Schoorman FD, Donaldson L (1997) Toward a stewardship theory of management. Acad Manag Rev 22(1):20–47Google Scholar
  18. Demirgüç-Kunt A, Maksimovic V (1998) Law, finance, and firm growth. J Finance 53(6):2107–2137Google Scholar
  19. Dittmar A, Mahrt-Smith J (2007) Corporate governance and the value of cash holdings. J Financ Econ 83(3):599–634Google Scholar
  20. Dittmar A, Mahrt-Smith J, Servaes H (2003) International corporate governance and corporate cash holdings. J Financ Quant Anal 38(1):111–133Google Scholar
  21. Fahlenbrach R (2008) Shareholder rights, boards, and CEO compensation. Rev Finance 13(1):81–113Google Scholar
  22. Filatotchev I, Boyd BK (2009) Taking stock of corporate governance research while looking to the future. Corp Gov 17:257–265Google Scholar
  23. Fluck Z, Lynch A (1999) Why do firms merge and divest: a theory of financial synergy. J Bus 72(3):319–346Google Scholar
  24. Gertner R, Scharfstein D, Stein J (1994) Internal versus external capital markets. Q J Econ 109:1211–1230Google Scholar
  25. Giroud X, Mueller HM (2011) Corporate governance, product market competition, and equity prices. J Finance 66(2):563–600Google Scholar
  26. Gompers PA, Ishii JL, Metrick A (2003) Corporate governance and equity prices. Q J Econ 118:107–155Google Scholar
  27. Gormley T, Matsa D (2011) Growing out of trouble? Corporate responses to liability risk. Rev Financ Stud 24(8):2781–2821Google Scholar
  28. Hambrick DC, Finkelstein S (1987) Managerial discretion: a bridge between polar views of organizational outcomes. Res Organ Behav 9:369–406Google Scholar
  29. Hermalin BE, Weisbach MS (1998) Endogenously chosen boards of directors. Am Econ Rev 88(1):96–118Google Scholar
  30. Hermalin BE, Weisbach MS (2003) Board of directors as an endogenously determined institution: a survey of the economic literature. Econ Policy Rev 9(1):7–26Google Scholar
  31. Himmelberg CP, Hubbard RG, Palia D (1999) Understanding the determinants of managerial ownership and the link between ownership and performance. J Financ Econ 53(3):353–384Google Scholar
  32. Hubbard RG, Palia D (1999) A reexamination of the conglomerate merger wave in the 1960s: an internal capital markets view. J Finance 54(3):1131–1152Google Scholar
  33. Jiraporn P, Kim YS, Davidson WN, Singh M (2006) Corporate governance, shareholder rights and firm diversification: an empirical analysis. J Bank Finance 30(3):947–963Google Scholar
  34. Lamont O (1997) Cash flow and investment: evidence from internal capital markets. J Finance 52(1):83–109Google Scholar
  35. Mackey A (2008) The effect of CEOs on firm performance. Strateg Manag J 29(12):1357–1367Google Scholar
  36. Manne HG (1965) Mergers and the market for corporate control. J Political Econ 73(2):110–120Google Scholar
  37. Masulis RW, Wang C, Xie F (2007) Corporate governance and acquirer returns. J Finance 62(4):1851–1889Google Scholar
  38. McGahan AM, Porter ME (1997) How much does industry matter, really? Strateg Manag J 18:15–30Google Scholar
  39. Rajan RG, Servaes H, Zingales L (2000) The cost of diversity: the diversification discount and inefficient investment. J Finance 55:35–80Google Scholar
  40. Scharfstein DS (1998) The dark side of internal capital markets II: evidence from diversified conglomerates. NBER working paper 6352, National Bureau of Economic ResearchGoogle Scholar
  41. Scharfstein DS, Stein JC (2000) The dark side of internal capital markets: divisional rent-seeking and inefficient investment. J Finance 55(6):2537–2564Google Scholar
  42. Shin HH, Stulz RM (1998) Are internal capital markets efficient? Q J Econ 113(2):531–552Google Scholar
  43. Shleifer A, Vishny RW (1997) A survey of corporate governance. J Finance 52(2):737–783Google Scholar
  44. Stein JC (2003) Agency, information and corporate investment. In: Constantinides G, Harris M, Stulz R (eds) Handbook of the economics of finance. Elsevier, Amsterdam, pp 111–165Google Scholar
  45. Tosi HL (2008) Quo vadis? Suggestions for future corporate governance research. J Manag Gov 12(2):153–169Google Scholar
  46. Villalonga B (2004) Does diversification cause the “diversification discount”? Financ Manag 33(2):5–27Google Scholar
  47. Williamson OE (1975) Markets and hierarchies: analysis and antitrust implications. Free Press, New YorkGoogle Scholar
  48. Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105(3):581–606Google Scholar
  49. Young G, Smith KG, Grimm CM (1996) “Austrian” and industrial organization perspective on firm-level competitive activity and performance. Organ Sci 7:243–254Google Scholar

Copyright information

© Springer-Verlag GmbH Germany 2017

Authors and Affiliations

  1. 1.Business Management GroupUniversity of MuensterMuensterGermany
  2. 2.Chair of Business ManagementUniversity of MuensterMuensterGermany

Personalised recommendations