In addition to the economic, political and legal risks faced by fixed income investors, equity investors in emerging markets face corporate governance risks. Their ownership claims may be expropriated by corporate insiders, dominant shareholders or the government. Interested parties may misuse the companies’ assets. Weak disclosure and accounting standards may result in limited transparency that favors insiders. Weak checks and balances on governmental actions may bring about regulatory uncertainty, seizure of property or nationalization.
CFA makes a point to highlight the additional risk faced by equity over fixed-income investors. I don’t really get it.
If a 3rd world country can expropriate your equity ownership, you’re telling me they can’t just not return your fixed income investment? You’re telling me misusing company assets isn’t a risk for bond investors? You’re telling me that weak governance is a problem for equity but not bond investors?
I get that maybe the degree of risk for equity may be higher than debt, which is always the case in a capital structure. But I just don’t get the point that they are trying to hammer down with this LOS.