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The Geography of Investment: Informed Trading and Asset Prices

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  • Joshua Coval

    (University of Michigan)

  • Tobias Moskowitz

    (University of Chicago)

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    Abstract

    This paper uses geography to shed light on the role of asymmetric information in asset pricing. Demonstrating that investors possess significant informational advantages in evaluating nearby investments, we find that active mutual fund managers overweight proximate firms in their portfolios and earn substantial abnormal returns in local holdings. These findings are more pronounced among funds which are small, have few holdings, and operate out of remote locations. Aggregating across all funds, we use the fraction of a stock's shares held by local investors as a measure of the information asymmetry in its investor base. We find that a firm's degree of local ownership is positively related to the cross-section of expected returns, even when controlling for other factors known to explain return variation. The results document new evidence of informed trading and establish a link between such trading and asset prices.

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    File URL: http://fmwww.bc.edu/RePEc/es2000/1379.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1379.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1379

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    Cited by:
    1. Viral V. Acharya & Jean Imbs & Jason Sturgess, 2006. "Finance and Efficiency: Do Bank Branching Regulations Matter?," Swiss Finance Institute Research Paper Series 06-36, Swiss Finance Institute.

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