Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 120: Ownership, Economic Entrenchment and Allocation of Capital

Sameeksha Desai and Johan E. Eklund ()
Additional contact information
Sameeksha Desai: University of Missouri and Max Planck Institute of Economics
Johan E. Eklund: Jönköping International Business School and The Royal Institute of Technology, Postal: Department of Economics, Jönköping International Business School, P.O Box 1026, 551 11, Jönköping, Sweden

Abstract: In an efficient economy, capital should be quickly (re)allocated from declining firms and sectors to more profitable investment opportunities. This process is affected by the concentration of corporate control, which in turn is affected by market institutions. We employ a panel of 12,000 firms across 44 countries to estimate the functional efficiency of capital markets. We adapt a measure for the efficiency of capital allocation using the accelerator principle. Our empirical results show weak property rights and highly concentrated ownership reduce the functional efficiency of capital markets. Findings support the economic entrenchment hypothesis but not the legal origins hypothesis.

Keywords: Allocation of capital; accelerator principle; ownership; functional efficiency; economic entrenchment

JEL-codes: G32; L20; P00

36 pages, May 12, 2008

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