This paper proposes a new explanation for the excess co-movement in default risk observed across borrowers. We develop a model with endogenous default decisions in a multi-borrower economy, where a negative idiosyncratic shock to one borrower reduces its creditworthiness while simultaneously increasing the relative importance of another borrower. The resulting increase in systematic risk raises the borrowing costs of the latter, accelerating its default decision, particularly when short-term refinancing is required. This mechanism uncovers a novel source of default risk dependence that cannot be attributed to shared fundamental shocks alone. Moreover, the embedded leverage in equity enables our model to jointly explain excess co-movement in default probabilities, credit spreads, equity returns, and equity volatilities, aligning with recent empirical evidence across U.S. industries.

We compare nature risk management in domestic and foreign institutional investments using a comprehensive global sample of firms covered by the S&P nature risk and FactSet ownership datasets. Physical risk and biodiversity risk negatively predict domestic and foreign institutional ownership at the firm level. At the institution-firm level, institutions avoid firms with high physical risk exposure more in domestic investments compared to foreign ones, possibly because of a higher perception or easier assessment of domestic physical risks. Conversely, institutions tilt toward high-biodiversity-dependency firms in their domestic portfolios while avoiding similar firms in their foreign ones, indicating a preference for engagement at home and divestment abroad. These differences in nature risk management between domestic and foreign investments cannot be explained by differences in risk-adjusted returns.