In this thesis, I examine why there are distortions in investor portfolio selection, and show the consequence of these distortions on firms' investment decisions. The thesis consists of three essays. In the first essay, I examine the economic consequences of the mandatory adoption of IFRS in EU countries by showing which types of economies have the largest reduction in investment-cash flow sensitivity post-IFRS. I also examine whether the reduction in investment-cash flow sensitivity depends on firm size as well as economy type. I find that the investment-cash flow sensitivity of insider economies is higher than that of outsider economies pre-IFRS and that IFRS reduces the investment-cash flow sensitivity of insider economies more than that of outsider economies. Also, I find that small firms in insider economies have the highest sensitivity of investment to lagged cash flow pre-IFRS, and that they are no longer sensitive to lagged cash flow post-IFRS. Overall, my results suggest that IFRS adoption might have improved the functioning of capital markets in relation to small firms in insider economies. In the second essay, I show that the level of conditional accounting conservatism of foreign markets significantly influences decisions to diversify portfolios internationally. This could be either because conditional conservatism per se is attractive to international investors, or because the unmodelled factors that attract foreign investors to a country also cause these countries to adopt conditionally conservative accounting practices. We also find that the positive association between investor diversification decision and conditional conservatism is sensitive to the level of conditional conservatism of investors' home markets. If conditional conservatism serves to alleviate foreign investors' concerns related to insiders have asymmetric access to information then one would expect the chosen mode of entry into a foreign market (as foreign portfolio or direct investor) to be sensitive to the level of conditional conservatism. I find evidence supportive of this expectation.In the third and final essay, I document pieces of evidence suggesting that the stock ownership of politicians is a mechanism to establish mutual relations with firms. There is a positive association between the ownership of politicians and the contribution they receive from firms during the elections. This association is a function of how valuable it is to establish a mutual relation between politicians and firms. Politicians invest more in firms that favor their party and less in firms that oppose their party. The strength of the ownership-based relation with contributing firms is positively associated with the amount as well as the number of government contracts awarded to firms. When politicians divest the stock, the established relation with contributing firms breaks down. Such break-down, however, only exist when there are no other mechanisms enforcing politician-firm relation.