Equity Home Bias When Firms are Indebted

75 Pages Posted: 4 Aug 2021 Last revised: 29 Dec 2021

See all articles by Andres Mesa Toro

Andres Mesa Toro

University of Navarra - Faculty of Economics and Business

Antonio Moreno

School of Economics and Business, University of Navarra

Julieta Sammartino

affiliation not provided to SSRN

Tommaso Trani

University of Navarra - School of Economics

Date Written: December 29, 2021

Abstract

Generally, labor earnings depend on the financial leverage of firms. We account for this to revisit the classical and debated argument according to which equity home bias is the consequence of investors seeking to insure against idiosyncratic changes in their labor income. In an otherwise standard international macro model with portfolio choice, leverage has real effects on the labor market and households' risk sharing motives through the credit spread. Driven by two types of technology shocks and financial shocks, this model suggests that leverage reduces the appetite for domestic equities. This result is consistent with the negative correlation between the change in equity home bias and that in the credit to non-financial corporations found in advanced economies’ data for the period 1980 through 2018.

Keywords: risk sharing, country portfolios, contract enforcement, working capital, leverage

JEL Classification: E2, F4, G11, G15

Suggested Citation

Mesa Toro, Andres and Moreno, Antonio and Sammartino, Julieta and Trani, Tommaso, Equity Home Bias When Firms are Indebted (December 29, 2021). Available at SSRN: https://ssrn.com/abstract=3898026 or http://dx.doi.org/10.2139/ssrn.3898026

Andres Mesa Toro

University of Navarra - Faculty of Economics and Business ( email )

Campus Universitario
Pamplona, Navarra 31009
Spain

Antonio Moreno

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

Julieta Sammartino

affiliation not provided to SSRN

Tommaso Trani (Contact Author)

University of Navarra - School of Economics ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

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