This study examines the price reaction to the announcements of joint venture and strategic alliance formation, the main determinants of the partnering firm's choices to enter a specific joint venture and a specific strategic alliance, and the impact of such alliance formation on partnering firms' valuation. The analysis of the price reaction at the announcement of alliance formation indicates that market can distinguish between value creating and non-value creating alliances. I also provide evidence supporting the argument that alliance formation is not a random process. A firm's choice of entering an alliance designed as diversifying or non-diversifying strategy is a result of a complex interaction of external factors and internal needs. Finally, using the change in excess value from the year prior to the year following the alliance formation, I document that alliance formation negatively impacts the valuation of the single segment partnering firms relative to their industry peers, and has no impact on the valuation of multiple segment firms. Thus, single segment firms entering alliances are facing the trade-off between the longterm benefit provided by the alliance and the immediate costs affecting the activity developed in the house.

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Does efficient internal investment generally translate into successful external investment activities? In this research we use the internal capital allocation efficiency as a proxy for the efficiency of internal investment, and study whether firms that are internally efficient also make efficient external investment decisions. Our sample consists of multi-segment acquirers that announce acquisitions between 1986 and 2003 (only completed deals are included). We estimate short-term and long-term abnormal performance, excess value and operating performance around mergers in order to measure the success of acquisitions (external investment decisions). Our results indicate that internal capital allocation efficiency is indeed a significant factor in the success of acquisition. Firms that are internally efficient also make efficient external investment decisions. Conversely, internally inefficient firms are also externally inefficient. Thus, our results indicate that internal efficiency can be used as a predictor of the success and efficiency of external investment decisions.

The purpose of this research is to explore the motivation of business group firms to adopt pyramidal ownership structures. The traditional approach claims that pyramids are useful in tunneling resources to other affiliates by transferring value to firms with high cash flow rights of controlling shareholders. Using a unique dataset of 7,180 Ecuadorian firms, I analyze the transmission of profits' shocks among group firms to assess the existence and the amount of tunneling. The comprehensive ownership information allows me to identify pyramidal and horizontally owned group firms separately and better understand the nature of their ownership structure. The results provide support for the existence of tunneling in Ecuadorian business groups. About 70% of the profits of the average group firm are transferred to another affiliate, although only half of this money shows up on its books. An alternative explanation for the flow of money among group firms is the existence of internal capital markets to substitute for imperfections in the external market. I test this hypothesis by comparing the impact of cash flow availability in the investment decision of group firms with that of stand-alone firms. Group firms' cash flow to investment sensitivity appears to be only half of the value for comparable standalone firms. Moreover, group liquidity is also a determinant of the average group firm's investment, especially for pyramidal firms. The analysis sheds light on the nature of business groups in Latin America, their ownership patterns, and their resource allocation decisions.

This paper investigates the impact of diversification and the financial crisis on firm performance in India.The dataset of this paper is focused on Indian publicly listed firms between 2006 and 2012. By analyzingaccounting-based and market-based measures of firm performance, this study tries to explain the factorsthat influences the costs and benefits of diversified firms compared to non-diversified firms. This studyfound that diversified firms have on average a higher firm performance than non-diversified firms.During the global financial crisis, the performance of both diversified and non-diversified firms in Indiadeteriorated caused by a meltdown of global economic activities. This study does not find evidence thatdiversified firms perform relatively better than non-diversified firms during crisis times. Diversification isexpected to be more beneficial in the absence of well-developed and integrated capital markets due theeffects of “more money” and “smarter money”, arising from an increased efficiency of the internalcapital market. The analysis gives an impression that the total number of diversified firms increased afterthe crisis.

This paper examines the impact of CEO turnover from an internal capital allocation perspective. We test whether new CEOs make different divisional investment decisions than their predecessors, and if yes, how would this difference affect firm performance. We find that segment investments respond to factors, such as segment investment opportunity, segment cash flow, and other segments’ cash flows, differently after CEO turnover. Evidence also indicates that new CEOs adjust the segments’ previous over-investment /under-investment status to match industry average investment level, and they adjust the relative investment preference among divisions. These findings support the argument that different CEOs have their own set of skills and incentives, which directly affect their internal capital allocation decisions after they take over the office. We also examine the affiliation relationship between certain divisions and new CEOs, and find that new CEOs do not make capital allocation in favor their affiliated divisions. Furthermore, the analyses on firm-level internal capital allocation sensitivity do not support the literature about positive relationship between firm performance and the “Q-sensitivity”. But, our analyses do find a positive and robust relationship between changes in firm performance and changes in the “cash flow-sensitivity”. This suggests that new CEOs making internal capital allocation in favor of their “cash cow” segments are more likely to improve firm performance after CEO turnover.

Corporate investment decisions are among the most important decisions of a firm. Internal capital markets play a key role in facilitating the allocation of capital resources in order to finance investment projects within diversified firms. This thesis investigates internal capital markets and its relationship with analysts earnings forecast errors in three countries with two distinct financial systems, namely, the market-based and bank-based financial system. Using segment level data for public listed companies in the UK, France and Germany between 2005 and 2010, we examine the operation and efficiency of internal capital markets in market- and bank-based systems. We also examine the impact of the financial crisis of 2008 on internal capital markets and analysts earnings forecasts errors, namely, the accuracy, bias and dispersion. The findings indicate internal capital markets actively facilitate the allocation of resources within diversified firms and, in general, operate inefficiently. Furthermore, internal capital markets appear to be more active in France compared with the UK. On the other hand, their role appears to be limited in Germany, as segments appear to rely more on their own resources and less on internal capital markets for investments. In addition, we find that internal capital market activity declines and efficiency improves during the financial crisis in UK. In contrast, there is no significant evidence to suggest that efficiency improves during the crisis in France or Germany. This research also finds some evidence to suggest internal capital markets operations aggravate firm complexity and, in turn, negatively affect short-term forecast accuracy in the UK. In addition to this, our analysis shows there is a positive relationship between the size of internal capital markets and dispersion in analysts earnings forecasts. In general, our study shows analysts are optimistic about firms future performance; however, the level of optimism significantly declines during the financial crisis. Lastly, we report a positive relationship between efficiency of internal capital markets and optimism in earnings forecasts.

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we find that this effect is prevalent in subsidiaries with high information asymmetry, in subsidiaries that are weakly monitored, and subsidiaries of cash-rich MNCs. Natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law which eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs. / Series: WU International Taxation Research Paper Series

Background: In Sweden, only 652 companies have managed to reach the criterions stated by Dagens Industri in their ranking of the Swedish gazelle compa-nies. Rapidly growing companies are very important for the creation of job opportunities and economic wealth. Growth is associated with significant costs, especially for a manufacturing company, and capital is therefore vital for a company’s prosperity. Capital can be either internally generated or externally provided. Previous research has shown that companies firstly prefer internally generated funds, then debt and last new equity. Purpose: The purpose of this thesis is to describe, analyze and provide examples on how Swedish gazelle companies have financed their growth, what financing options they have and for what purposes they needed finance. The thesis will also examine the importance of external financer’s contribution with financial and human capital for the growth of the gazelles. Method: A qualitative approach has been used to meet the purpose of the thesis. 12 in-depth, unstructured phone interviews have been conducted with some of the fastest growing gazelle companies in Sweden. Conclusions: A company can finance its growth using owner’s equity, retained earnings, leasing, factoring, public subsidies and loans, bank loans, venture capital and business angels. All these sources of finance are represented in the empirical findings except for factoring. Internally generated capital has mainly been used to cover working capital and to some extent smaller in-vestments. The externally provided capital has mainly been invested in larger investments like machines, property and product development. The financial capital has been the main contribution by external financers except for business angels, where the human capital was most important.

We derive empirical predictions from the standard investment-cash flow framework on the functioning of internal capital markets (ICM), but circumvent its criticism by focusing on parent cash flow and investment opportunities. We test these predictions using a unique data set of parent firms and their listed and unlisted subsidiaries in 90 countries over the period 1995-2006. We find that company and country institutional structures matter. (1) Ownership participation of the parent firm in the subsidiary plays a crucial role for the proper functioning of ICMs. The larger the ownership stake of the parent, the better the functioning of the ICM. (2) The best functioning cross-border ICMs can be found in the sub-sample of firms with parents from a country with "strong" institutions and subsidiaries from a country with "weak" institutions. (3) Unlisted subsidiaries are much more dependent on the ICMs their parents provide than listed subsidiaries. Thus, ICMs are not per se "bright" or "dark", their proper functioning depends on how they are set up. (authors' abstract)