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...

Casual observation suggests that capital allocation is often driven by favoritism and connections rather than by market mechanisms and information on future expected returns. We investigate when favoritism or markets emerge as an equilibrium outcome in the allocation of capital. We show that...