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|Title: ||Multinationals Do It Better: Evidence on the Efficiency of
Corporations’ Capital Budgeting|
|Authors: ||Greene, William H.|
Hornstein, Abigail S.
White, Lawrence J.
Yeung, Bernard Y.
|Issue Date: ||21-Mar-2006 |
|Series/Report no.: ||EC-06-04|
|Abstract: ||This paper examines the effectiveness of multinational
enterprises’ capital budgeting decisions as compared to the
decisions of purely domestic enterprises. This is an important question
because of multinationals’ role in allocating capital globally.
Answering this question may also shed light on whether multinationals
are indeed better managed than are purely domestic firms. We examine
this question empirically using the deviation of a firm’s
estimated marginal Tobin’s q from an appropriate benchmark as an
indicator of effective resource allocation. We find that multinationals
make more efficient capital budgeting decisions than do purely domestic
firms. The result stems from multinational enterprises’ exercising
greater restraint on over-investment, but is not due to looser liquidity
constraints. In obtaining the result, we account for the impact of
institutional ownership, managerial ownership, and managerial
entrenchment. We also test whether multinationals’ greater capital
budgeting efficiency might be due to their investment locations, since
they might thereby be monitored by more agents and also may be more
successful in resisting pressures from special interest groups and
governments to adopt practices that are not consistent with firm value
maximization. We do not find support for the monitoring and bargaining
hypotheses. Our observations therefore suggest that multinationals may
be intrinsically better managed firms than are purely domestic firms.|
|Appears in Collections:||Economics Working Papers|
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