Which Investors Fear Expropriation? Evidence from Investors’ Portfolio Choices

Interesting commentary by Nureen CHAN Wan Wei (Year 4 accounting undergrad at SMU): https://asianextractor.com/2015/01/13/tunneling-through-intercorporate-loans-the-china-experience/comment-page-1/#comment-94

KB: So investors will not invest in firms with poor corporate governance (e.g. asymmetric information) that are more susceptible to accounting fraud and expropriation risk?

– Quick comments on Gianetti and Simonov (2006, JF): Individuals connected with company insiders are more likely to invest in weak corporate governance companies as they are able to extract private benefits or access private information to earn higher returns. Investors’ preferences for stocks are not driven only by conventional proxies for risk!

– Quick comments on Morck et al (2005): In emerging markets, investors invest in family-controlled firms, even if they knew that there are adverse selection costs and that there are potential expropriation of assets, because they perceive that it is far better to earn some returns with these dominant family firms when few alternatives are available

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.00879.x/abstract

Which Investors Fear Expropriation? Evidence from Investors’ Portfolio Choices

MARIASSUNTA GIANNETTI and ANDREI SIMONOV*

The Journal of Finance

Volume 61Issue 3pages 1507–1547June 2006

ABSTRACT

Using a data set that provides unprecedented detail on investors’ stockholdings, we analyze whether investors take the quality of corporate governance into account when selecting stocks. We find that all categories of investors (domestic and foreign, institutional and small individual) who generally enjoy only security benefits are reluctant to invest in companies with weak corporate governance. In contrast, individuals connected with company insiders are more likely to invest in weak corporate governance companies. These findings suggest that it is important to distinguish between investors who enjoy private benefits or access private information, and investors who enjoy only security benefits.

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