The study investigates if the level of investment opportunities reduces the positive impact
of expropriation incentive on the level of overinvestments. Under the condition of capital
constraint, high incentive of controlling shareholders to expropriate firms’ wealth do not
necessarily result in overinvesments if firms have abundant investment opportunities. The
study also examine if positive investment-cash flow sensitivity still exists after a
significant corporate governance reforms in Indonesia. The study finds no positive
relation between investments and cash flow. It documents that overinvestments primarily
occur in firms whose controlling shareholders have small ownership. Further, it
documents that higher investment opportunities mitigate the effect of expropriaton
incentive on overinvestments
