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

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

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. We test this proposition using data on U.S. Census regions and states, and find clear-cut support for it. 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. This effect is especially pronounced for smaller, less visible firms, where the impact of location on stock prices is roughly 12 percent.

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File URL: http://www.nber.org/papers/w11488.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11488.

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Date of creation: Jul 2005
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Publication status: published as Hong, Harrison, Jeffrey D. Kubik and Jeremy C. Stein. “The Only Game in Town: The Stock Price Consequences of Local Bias.” Journal of Financial Economics 90 (2008): 20-37.
Handle: RePEc:nbr:nberwo:11488
Note: AG CF
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