Not in my Backyard – Portfolio Allocation under Water Scarcity
Single-authored
Investors typically overweight domestic equities, reflecting a persistent home bias. This paper studies a setting in which domestic holdings carry more risk than foreign holdings do, giving rise to a not-in-my-backyard effect in portfolio choice that could attenuate or even reverse this home bias. I formalize a model in which investors tilt away from firms that contribute to resource constraints in the economies to which they are most exposed, and I examine this empirically in the context of water: a critical, geographically constrained input whose scarcity varies across firms and locations. Domestic ownership is lower for firms contributing to water scarcity at headquarters, a pattern that does not hold for foreign ownership and is therefore difficult to reconcile with uniform risk pricing. A one-standard-deviation increase in local water scarcity is associated with a 14.5 to 45.4 percent decline in portfolio share relative to the mean domestic position, and the asymmetry is stable over long horizons, inconsistent with a short-lived informational frictions explanation. The results are consistent with portfolio allocations shifting away from firms that contribute most to binding local constraints as resource scarcity intensifies.
Thirsty for Returns? The Impact of Water Risk on the Global Stock Market
with Romulo Alves, Eline ten Bosch, Mathijs van Dijk, Marloes Hagens
Firms central to future economic growth—those underpinning global energy, information, and food systems—are heavily reliant on water availability within their supply chains. As water resources come under increasing stress from economic expansion, population growth, and climate change, local disruptions can propagate through supply networks and generate global economic consequences. To examine whether investors price this risk, we develop a novel water stress metric that combines corporate water use data with NASA satellite measures of local water level fluctuations. We find that stocks of firms more water-dependent than their industry peers earn 2.15% higher returns, with the effect concentrated in supply chain water use, which accounts for roughly 80% of total corporate demand. Furthermore, in the most water-dependent industries, firms operating in locations experiencing declining water levels earn a return premium. These results suggest that investors recognize water scarcity as a systematic, non-diversifiable risk.
Firm Financing and Investment Efficiency on the Amsterdam Stock Exchange; 1881-1940
with Abe de Jong, Pieter Drok, Josef Lilljegren
This paper studies the efficiency of capital allocation among exchange-listed firms in The Netherlands between 1881 and 1940. We investigate sources of investment funding by Dutch corporations, including internal cash flows, public funding via the stock exchange, and private funding by investors and intermediaries. We measure the efficiency of allocating capital and investments using investment-cash flow sensitivity models, where we control for firm growth opportunities. For identification purposes, we utilize shocks to external financing (temporary stock market closure in 1914 and banking crisis in 1923) to determine whether limited access to external funds affected investment behavior. We find that the Amsterdam Stock Exchange only played a minor role in total financing of Dutch firms between 1881 and 1940, but firm internal funding is the key source of financing.
Thalassa de Waal 