Abstract
Using a unique data set of foreign equities traded on the London Stock Exchange in the late 19th century, we study the relation between expropriation risk, finance, and economic development. We find that British investors demanded a higher cost of equity capital from firms located in countries with weak property-rights institutions than they did from similarly risky firms in other countries. Further, the country-level cost of capital associated with expropriation risk is negatively related to present-day income and financial development. A simple equilibrium model of international capital flows and the expropriation risk premium rationalizes these results. Taken together, this evidence suggests that the quality of institutions influence growth and development, in part, through its effect on asset prices.
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