I develop a new asset pricing model where global institutional investors and local retail investors have non-overlapping investment opportunities. Institutional investors facilitate international risk-sharing between home-biased retail investors, which depends on their mandate, risk-bearing capacity, and substitutability of securities across countries. Securities earn a world market risk premium and an institutional local risk premium based on institutional risk aversion. Securities not held by institutions earn a retail local risk premium determined by retail investors’ risk aversion. The model is estimated using equity returns in 38 markets. The average annual institutional local risk premium is 2.76% in developed markets and 6.27% in emerging markets, while the retail local risk premium is 1.71% and 2.65%, respectively. Higher global institutional ownership lowers the cost of capital in emerging markets.

This paper proposes a new explanation for the observed excess co-movement in default risk across borrowers. In our equilibrium model, a negative idiosyncratic shock to one borrower reduces its creditworthiness but also makes another borrower a relatively larger player in the economy, increasing its systematic risk. This results in higher debt costs for the latter borrower, tilting its decision towards an earlier default, especially when the debt needs to be refinanced more rapidly. We thus identify a novel source of endogenous default risk dependence, which cannot be explained by commonality in fundamentals alone. Given the embedded leverage in equity, this model jointly generates positive excess co-movement in default probability, equity excess returns, and equity return volatility, aligning with new empirical evidence across U.S. industries. These results offer important insights into the interplay between credit and equity markets in a multi-borrower economy.

We study how firm ESG performance affects domestic and foreign institutional investments. At the firm level, the marginal effects of ESG on institutional ownership vary across institution origin and investment destination countries. At the institution-firm level, institutions tilt towards high-ESG firms only when they are domestic. We term this asymmetry in ESG preference between domestic and foreign investment the “ESG home bias”. We explore ESG information environment, country E&S awareness, and ESG factor discount as potential economic mechanisms and find that the ESG home bias reflects a combination of these factors, the most important being information asymmetry about the ESG outcome measured by ESG uncertainty.

We construct a comprehensive database of public firm ownership in 49 countries and study the investment scope and preferences of different types of investors. Aggregate home bias has declined but is still much higher in emerging markets (EMs). Institutions have become more globally diversified but invest in a limited number of stocks. Retail investors remain highly home-biased. Institutions of different domiciles and types continue to show a strong preference for larger, more liquid, and more visible firms in both pooled regressions and country-level analyses but exhibit considerably heterogeneous preferences for other firm characteristics. Retail investors are mostly present in small and illiquid firms.