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The Local Bias of Individual Investors

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  • Ning Zhu
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    Abstract

    This study investigates individual investors' bias towards nearby companies. Using data from a large U.S. discount brokerage, we find that individual investors tend to invest in companies closer to them relative to the market portfolio. Unlike Coval and Moskowitz's (1999) findings on institutional investors, however, we find that advantageous information cannot explain individual investors' local bias. Accounting numbers and information asymmetry matter less to individual investors' local bias than to that of institutional investors. Instead, we hypothesize that individuals' non-fundamentally based familiarity with local companies and ready reaction to local information are more plausible explanations. Consistent with this hypothesis, we find that individual investors are more likely to invest in remote companies that spend heavily on advertising. Evidence from investors' reactions to earnings announcements also confirms the hypothesis: local investors do not change their portfolios so as to take advantage of potentially advantageous information before earnings announcements. After earnings announcements, local investors change their portfolios more than remote investors in the direction opposite to the same earnings surprises.

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    File URL: http://icfpub.som.yale.edu/publications/2641
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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm272.

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    Date of creation: 01 Mar 2002
    Date of revision: 01 Sep 2009
    Handle: RePEc:ysm:somwrk:ysm272

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    Web page: http://icf.som.yale.edu/
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    Related research

    Keywords: Local Bias; Individual Behavior; Asset Pricing; Asymmetric Information; Overreaction; Familiarity;

    References

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    Cited by:
    1. Sodini, Paolo & Campbell, John & Calvet, Laurent E., 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Scholarly Articles 3122488, Harvard University Department of Economics.
    2. Zoran Ivkovich & Scott Weisbenner, 2004. "Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices," NBER Working Papers 10436, National Bureau of Economic Research, Inc.
    3. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc.
    4. Jeffrey R. Brown & Zoran Ivkovich & Paul A. Smith & Scott Weisbenner, 2004. "The Geography of Stock Market Participation: The Influence of Communities and Local Firms," NBER Working Papers 10235, National Bureau of Economic Research, Inc.
    5. Zoran Ivkovich & Scott Weisbenner, 2007. "Information Diffusion Effects in Individual Investors' Common Stock Purchases Covet Thy Neighbors' Investment Choices," NBER Working Papers 13201, National Bureau of Economic Research, Inc.

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