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The Only Game in Town: Stock-Price Consequences of Local Bias

  • Stein, Jeremy
  • Kubik, Jeffrey D.
  • Hong, Harrison

Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. Using data on U.S. states and Census regions, we find clear-cut support for this proposition. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density—e.g., the Deep South—are home to relatively few firms per capita, which leads to higher stock prices via an "only-game-in-town" effect.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3710665/Stein%20OnlyGameInTown.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3710665.

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Date of creation: 2008
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Publication status: Published in Journal of Financial Economics
Handle: RePEc:hrv:faseco:3710665
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