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Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments

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  • Scott Weisbenner
  • Zoran Ivkovich
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    Abstract

    Using a data set on the investments made by a large number of retail investors from 1991 to 1996, we find that households exhibit a strong preference for local investment - the average household invests nearly a third of their portfolio in firms headquartered within 250 miles. We test whether this locality bias is driven by information or by simple familiarity. The average household generates an additional return of 3.7% per year from its local holdings relative to its non-local holdings, suggesting local investors are able to exploit local knowledge. The excess return to investing locally is even larger among stocks not in the S&P 500 index (firms where informational asymmetries between local and non-local investors may be largest), while there is no excess return earned by households that invest in local S&P 500 stocks.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9685.

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    Date of creation: May 2003
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    Publication status: published as Weisbenner, Scott and Zoran Ivković. “Local Does as Local Is: Information Content of the Geography of Individual Investors’ Common Stock Investments." Journal of Finance 60, 1 (2005): 267-306.
    Handle: RePEc:nbr:nberwo:9685

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    1. Gehrig, Thomas, 1993. " An Information Based Explanation of the Domestic Bias in International Equity Investment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(1), pages 97-109.
    2. Alok Kumar & Ravi Dhar, 2001. "A Non-Random Walk Down the Main Street: Impact of Price Trends on Trading Decisions of Individual Investors," Yale School of Management Working Papers ysm208, Yale School of Management.
    3. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
    4. 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.
    5. Alok Kumar & William N. Goetzmann, 2001. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm236, Yale School of Management.
    6. Brad M. Barber & Terrance Odean, 2001. "Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 261-292, February.
    7. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
    8. Shlomo Benartzi, 2001. "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," Journal of Finance, American Finance Association, vol. 56(5), pages 1747-1764, October.
    9. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-80.
    10. Ravi Dhar & Ning Zhu, 2002. "Up Close and Personal: An Individual Level Analysis of the Disposition Effect," Yale School of Management Working Papers ysm269, Yale School of Management, revised 01 Sep 2009.
    11. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(4), pages 811-841, August.
    12. Cooper, Ian & Kaplanis, Evi, 1994. "Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 45-60.
    13. Nellie Liang & Scott Weisbenner, 2002. "Investor Behavior and the Purchase of Company Stock in 401(k) Plans - The Importance of Plan Design," NBER Working Papers 9131, National Bureau of Economic Research, Inc.
    14. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
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    Cited by:
    1. Jeffrey R. Brown & Zoran Ivkovic & Paul A. Smith & Scott Weisbenner, 2004. "The geography of stock market participation: the influence of communities and local firms," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-22, Board of Governors of the Federal Reserve System (U.S.).
    2. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
    3. Gina Nicolosi & Liang Peng, 2004. "Do individual investors learn from their trading experience," Econometric Society 2004 North American Summer Meetings 532, Econometric Society.
    4. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "The Only Game in Town: Stock-Price Consequences of Local Bias," NBER Working Papers 11488, National Bureau of Economic Research, Inc.
    5. Carol C. Bertaut & Linda S. Kole, 2004. "What makes investors over or underweight? explaining international appetites for foreign equities," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 819, Board of Governors of the Federal Reserve System (U.S.).
    6. Ridhwan, M.M. & Nijkamp, P. & Rietveld, P., 2008. "Regional development and monetary policy : a review of the role of monetary unions, capital mobility and locational effects," Serie Research Memoranda 0007, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    7. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2006. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," NBER Working Papers 12030, National Bureau of Economic Research, Inc.
    8. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2004. "Look at me now: the role of cross-listing in attracting U.S. investors," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 815, Board of Governors of the Federal Reserve System (U.S.).
    9. William N. Goetzmann & Massimo Massa & Andrei Simonov, 2004. "Portfolio Diversification and City Agglomeration," NBER Working Papers 10343, National Bureau of Economic Research, Inc.

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