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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

    We study the relation between households' stock purchases and stock purchases 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 households' own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states. Controlling for area sociability, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households' stock purchases and stock purchases made by their neighbors to word-of-mouth communication.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13201.

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    Date of creation: Jun 2007
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    Publication status: published as Review of Financial Studies (2007) 20 (4): 1327-1357. doi: 10.1093/revfin/hhm009
    Handle: RePEc:nbr:nberwo:13201

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    Cited by:
    1. Booth, G. Geoffrey & Gurun, Umit G. & Zhang, Harold, 2014. "Financial networks and trading in bond markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 18(C), pages 126-157.
    2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2009. "Reinforcement Learning and Savings Behavior," Journal of Finance, American Finance Association, American Finance Association, vol. 64(6), pages 2515-2534, December.
    3. Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2011. "Private Information, Human Capital, and Optimal “Home Bias” in Financial Markets," Journal of Human Capital, University of Chicago Press, University of Chicago Press, vol. 5(3), pages 255 - 301.
    4. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    5. Abreu, Margarida & Mendes, Victor, 2012. "Information, overconfidence and trading: Do the sources of information matter?," Journal of Economic Psychology, Elsevier, Elsevier, vol. 33(4), pages 868-881.
    6. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(3), pages 547-565.

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