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The only game in town: Stock-price consequences of local bias

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  • Hong, Harrison
  • Kubik, Jeffrey D.
  • Stein, Jeremy C.

Abstract

Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. Using data on U.S. states and Census regions, we find clear-cut support for this proposition. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density--e.g., the Deep South--are home to relatively few firms per capita, which leads to higher stock prices via an "only-game-in-town" effect.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 90 (2008)
Issue (Month): 1 (October)
Pages: 20-37

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Handle: RePEc:eee:jfinec:v:90:y:2008:i:1:p:20-37

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Local bias Segmented markets;

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Citations

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Cited by:
  1. Morris A. Davis & Jonathan Heathcote, 2004. "The price and quantity of residential land in the United States," Finance and Economics Discussion Series 2004-37, Board of Governors of the Federal Reserve System (U.S.).
  2. Kandel, Eugene & Massa, Massimo & Simonov, Andrei, 2011. "Do small shareholders count?," Journal of Financial Economics, Elsevier, vol. 101(3), pages 641-665, September.
  3. Hong, Harrison & Kacperczyk, Marcin, 2009. "The price of sin: The effects of social norms on markets," Journal of Financial Economics, Elsevier, vol. 93(1), pages 15-36, July.
  4. Fu, Shihe & Shan, Liwei, 2011. "Agglomeration Economies and Local Comovement of Stock Returns," MPRA Paper 31887, University Library of Munich, Germany.
  5. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
  6. Shive, Sophie, 2012. "Local investors, price discovery, and market efficiency," Journal of Financial Economics, Elsevier, vol. 104(1), pages 145-161.
  7. Bogdan Dima & Laura Raisa Milos, 2009. "Testing The Efficiency Market Hypothesis For The Romanian Stock Market," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 41.
  8. Juan Pedro Gomez, 2008. "The effect of relative wealth concerns on the cross-section of stock returns," Working Papers Economia wp08-12, Instituto de Empresa, Area of Economic Environment.
  9. Baltzer, Markus & Stolper, Oscar & Walter, Andreas, 2013. "Is local bias a cross-border phenomenon? Evidence from individual investors' international asset allocation," Discussion Papers 18/2013, Deutsche Bundesbank, Research Centre.
  10. Marc Rapp & Bernhard Schwetzler, . "Asset Prices in the Presence of a Tax Authority," German Working Papers in Law and Economics 2006-1-1167, Berkeley Electronic Press.
  11. Berry, Thomas & Gamble, Keith Jacks, 2013. "Informed local trading prior to earnings announcements," Journal of Financial Markets, Elsevier, vol. 16(3), pages 505-525.
  12. Matías Braun & Borja Larrain, 2005. "Supply matters for asset prices: evidence from IPOs in emerging markets," Working Papers 06-4, Federal Reserve Bank of Boston.

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