DP3843 Which Investors Fear Expropriation? Evidence from Investors' Stock Picking

Author(s): Mariassunta Giannetti, Andrei Simonov
Publication Date: March 2003
Keyword(s): corporate governance, investor behaviour, portfolio selection, ratio of control to cash flow rights, security benefits
JEL(s): F21, G11, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3843

Using a data-set that provides unprecedented details on individual investors? stockholdings, we analyse whether investors take into account corporate governance when they select stocks. After controlling for the supply effect via free float and other firm characteristics, we find that all categories of investors who generally enjoy only security benefits (domestic and foreign; institutional and small individual investors) are reluctant to invest in companies with bag corporate governance. In contrast, individuals who have strong connections with the local financial community because they are board members or hold large blocks of at least some listed companies behave differently. They do not care about the expected extraction of private benefits or even prefer to invest in firms where there is more room for it. Overall, the effect of corporate governance on portfolio decisions is more pronounced for small and medium size companies. These findings shed new light on the determinants of investor behaviour, and suggest that it is important to distinguish between investors who enjoy private benefits or access private information and investors who enjoy only security benefits in order to understand portfolio choices.