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Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices

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  • Zoran Ivkovich
  • Scott Weisbenner
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    Abstract

    Using data on stock purchases individual investors made through a discount broker from 1991 to 1996, we study information diffusion effects the relation between household investment choices and those made by their neighbors. A ten percentage point increase in neighbors' purchases of stocks from an industry is associated with a two percentage point increase in the household's own purchases of stocks from that industry, with the effect considerably larger for purchases of local stocks. The presence of information diffusion effects is robust to controls for potential inside information effects and to household fixed effects. Upon controlling for aggregate trading patterns, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-third to one-half of the overall diffusion effect to word-of-mouth communication. Disentangling the overall diffusion effect suggests that the significant relation between our measures of information diffusion and subsequent industry-level returns appears to be driven by its word-of-mouth component.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10436.

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    Date of creation: Apr 2004
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    Publication status: published as Ivković, Zoran and Scott Weisbenner. “Information Diffusion Effects in Individual Investors’ Common Stock Purchases: Covet Thy Neighbors’ Investment Choices.” Review of Financial Studies 20, 4 (2007): 1327-1357.
    Handle: RePEc:nbr:nberwo:10436

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    1. Ning Zhu, 2002. "The Local Bias of Individual Investors," Yale School of Management Working Papers ysm272, Yale School of Management, revised 01 Sep 2009.
    2. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Scholarly Articles 3196332, Harvard University Department of Economics.
    3. Ellison, Glenn & Fudenberg, Drew, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 93-125, February.
    4. Esther Dufluo & Emmanuel Saez, 2003. "The role of information and social interactions in retirement plan decisions: Evidence from a randomized experiment," Framed Field Experiments 00141, The Field Experiments Website.
    5. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers," Journal of Finance, American Finance Association, vol. 60(6), pages 2801-2824, December.
    6. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    7. Esther Duflo & Emmanuel Saez, 2003. "The Role Of Information And Social Interactions In Retirement Plan Decisions: Evidence From A Randomized Experiment," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 815-842, August.
    8. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
    9. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2001. "Social Interaction and Stock-Market Participation," NBER Working Papers 8358, National Bureau of Economic Research, Inc.
    10. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
    11. Mark Grinblatt, 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades," Journal of Finance, American Finance Association, vol. 56(3), pages 1053-1073, 06.
    12. Esther Duflo & Emmanuel Saez, 2000. "Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues' Choices," NBER Working Papers 7735, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Aureo de Paula, 2004. "Social Interactions in a Synchronization Game," Econometric Society 2004 Latin American Meetings 277, Econometric Society.
    2. Mark Bowden & Stuart McDonald, 2008. "The Impact of Interaction and Social Learning on Aggregate Expectations," Computational Economics, Society for Computational Economics, vol. 31(3), pages 289-306, April.

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