Question

Question 23 How can home bias affect the cost of capital of domestic firms? Explain.

Answer 1

Home buyers is a biasness of domestic companies to to raise its capital in the domestic country itself and it does not look for raising capital outside the domestic territory so it will having a significant disadvantage when we will be looking it at perspective of lowering the cost of capital because all those companies who are operating through Global markets are trying to raise the Global financing in order to reduce their overall cost.

Home buyers is leading to increasing the cost of capital of various domestic company because the domestic company is not trying to look beyond the domestic market to to raise the cost of capital because there are various Global markets in which there will be various economic situations during various economic cycles which will offer these companies with lower cost of capital.

Hence, home biasness is leading to increase in the cost of capital of the domestic companies.