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Neighbors Matter: Causal Community Effects and Stock Market Participation

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  • JEFFREY R. BROWN
  • ZORAN IVKOVIĆ
  • PAUL A. SMITH
  • SCOTT WEISBENNER

Abstract

This paper establishes a causal relation between an individual's decision whether to own stocks and average stock market participation of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's nonnative neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time‐varying individual and community controls, and state‐year effects rules out alternative explanations. To further establish that word‐of‐mouth communication drives this causal effect, we show that the results are stronger in more sociable communities.

Suggested Citation

  • Jeffrey R. Brown & Zoran Ivković & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:3:p:1509-1531
    DOI: 10.1111/j.1540-6261.2008.01364.x
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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