Shareholder home bias drives 20 percent deeper investment cuts
Euro area companies with geographically diversified shareholders reduced capital expenditure by 20 percent less during the pandemic shock than home-biased peers. Granular security-level data reveals that cross-border equity access shielded firm resilience through equity buffers.
Equity buffers cushion macroeconomic shocks
Elena Banu, Lea Best, and Francesca Vinci linked the ECB Securities Holdings Statistics to Compustat records across 15,558 firm-year observations from 2015 to 2023.
Evaluating corporate responses to the COVID-19 disruption, the authors found that firms facing an average 16 percent export shock cut investment by 20 percent more when ownership was concentrated in domestic hands.
The investment divergence deepened to 29 percent by 2022.
The shortfall operated primarily through the equity channel: firms with high home bias experienced a 13 percent drop in book equity and a 9 percent decline in outstanding shares relative to sales, whereas sales trajectories and bank debt usage showed no significant differences between groups.
Nine percent inside the monetary union
Domestic investors hold an average 57 percent of euro area corporate equity, while holdings from other euro area member states account for only 9 percent.
The remaining 34 percent is held by investors from the rest of the world.
These holding shares remained virtually unchanged between 2015 and 2023, indicating stalled cross-border financial integration.
Cross-border equity holdings within the euro area are heavily intermediated by investment funds, leaving intra-union risk-sharing largely unexploited.
A compelling case for capital union
The findings show that equity home bias significantly cripples corporate investment during severe downturns.
With intra-euro holdings stuck at nine percent, resilience currently depends almost entirely on external capital.
Deepening the Capital Markets Union is thus an urgent macroeconomic imperative rather than a policy luxury.