The corporate finance literature has widely analysed the distortions due to agency problems and lack of protection of small investor rights in investment decisions. A maintained assumption is that ex ante outside investors require a higher return on the funds they provide since they anticipate the distortions due to agency problems. Weak rule of laws therefore affect the cost of funds, but not investor portfolio decisions.
However, there is casual evidence that stock market participation is larger in countries where minority investor rights are better protected. The research team plans to look into this issue, completely neglected in the previous literature, by looking at two specific cases. First, the researchers will examine whether institutions can explain why foreign investors and domestic minority shareholders invest less in countries where the probability of expropriation by the company s insiders is larger and whether this can explain the home equity bias. After, portfolio investors behaviour is analysed to evaluate whether minority investors underweight the companies where insiders are expected to extract more private benefits.