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

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.