Research
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
As freshwater levels decline and economic expansion and population growth place increasing pressure on global freshwater resources, many regions face growing water stress, exposing firms to potential operational disruptions. However, do investors care? This study examines the relation between global stock returns and corporate water use and stress from 2013 to 2024. We construct a novel monthly firm-level water stress measure by combining corporate water use with granular water supply data from NASA satellites. We find a statistically significant positive relation between corporate water use and global stock returns, and show that investors perceive water use as a systematic risk, demanding an annual premium of 2.15% for investing in firms with high water use. Also, indirect and total water use have a higher water use premium than direct water use. These results seem to suggest that investors particularly value water use within supply chains. Furthermore, we provide initial evidence of a potential water stress risk premium for firms in high-water-use industries.
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.
