Which Investors Fear Expropriation?

Using a data set that provides unprecedented details on the stockholders of Swedish listed companies, we analyze whether investors take into account corporate governance when they select stocks. We identify the companies where shareholders’ value is less likely to be maximized by using the wedge between the control and cash flow rights of the principal shareholder. After controlling for the supply effect via free float and firm size, we find that all the categories of investors (domestic and foreign; institutional and small individual investors) who generally enjoy only security benefits are reluctant to invest in companies where the ratio of control to cash flow rights is larger. 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.