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Social Proximity to Capital: Implications for Investors and Firms

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Listed:
  • Theresa Kuchler
  • Yan Li
  • Lin Peng
  • Johannes Stroebel
  • Dexin Zhou

Abstract

We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.

Suggested Citation

  • Theresa Kuchler & Yan Li & Lin Peng & Johannes Stroebel & Dexin Zhou, 2020. "Social Proximity to Capital: Implications for Investors and Firms," NBER Working Papers 27299, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:27299
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    Cited by:

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    3. Barth, James R. & Hu, Qinyou & Sickles, Robin & Sun, Yanfei & Yu, Xiaoyu, 2024. "Direct and indirect impacts of natural disasters on banks: A spatial framework," Journal of Financial Stability, Elsevier, vol. 70(C).
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    6. DuckKi Cho & Lyungmae Choi & Jessie Jiaxu Wang, 2023. "It's Not Who You Know—It's Who Knows You: Employee Social Capital and Firm Performance," Finance and Economics Discussion Series 2023-020, Board of Governors of the Federal Reserve System (U.S.).
    7. Diemer, Andreas & Regan, Tanner, 2022. "No inventor is an island: Social connectedness and the geography of knowledge flows in the US," Research Policy, Elsevier, vol. 51(2).
    8. Abakah, Alex Annan & Kim, Gunchang & Somé, Hyacinthe Yirlier, 2024. "Social networks and start-up funding," Finance Research Letters, Elsevier, vol. 64(C).
    9. Anna Cororaton & Samuel Rosen, 2021. "Public Firm Borrowers of the U.S. Paycheck Protection Program [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(4), pages 641-693.
    10. Dyer, Travis & Köchling, Gerrit & Limbach, Peter, 2024. "Traditional investment research and social networks: Evidence from Facebook connections," CFR Working Papers 24-03, University of Cologne, Centre for Financial Research (CFR).
    11. Oliver Rehbein & Simon Rother, 2020. "The Role of Social Networks in Bank Lending," ECONtribute Discussion Papers Series 033, University of Bonn and University of Cologne, Germany.
    12. Dong, Dayong & Jiang, Danling & Wu, Keke & Zhu, Hongquan, 2024. "Game in another town: Geography of stock watchlists and firm valuation," Journal of Banking & Finance, Elsevier, vol. 163(C).
    13. Cramer, Kim Fe & Koont, Naz, 2021. "Peer effects in deposit markets," LSE Research Online Documents on Economics 119192, London School of Economics and Political Science, LSE Library.
    14. Michael Bailey & Drew M. Johnston & Martin Koenen & Theresa Kuchler & Dominic Russel & Johannes Stroebel, 2022. "The Social Integration of International Migrants: Evidence from the Networks of Syrians in Germany," NBER Working Papers 29925, National Bureau of Economic Research, Inc.
    15. Bailey, Michael & Gupta, Abhinav & Hillenbrand, Sebastian & Kuchler, Theresa & Richmond, Robert & Stroebel, Johannes, 2021. "International trade and social connectedness," Journal of International Economics, Elsevier, vol. 129(C).
    16. Hirshleifer, David & Lo, Andrew W. & Zhang, Ruixun, 2023. "Social contagion and the survival of diverse investment styles," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    17. Hu, Zhongchen, 2022. "Social interactions and households’ flood insurance decisions," Journal of Financial Economics, Elsevier, vol. 144(2), pages 414-432.
    18. Laudenbach, Christine & Loos, Benjamin & Pirschel, Jenny & Wohlfart, Johannes, 2021. "The trading response of individual investors to local bankruptcies," Journal of Financial Economics, Elsevier, vol. 142(2), pages 928-953.
    19. Pedersen, Lasse Heje, 2022. "Game on: Social networks and markets," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1097-1119.
    20. Xinming Du, 2023. "Symptom or Culprit? Social Media, Air Pollution, and Violence," CESifo Working Paper Series 10296, CESifo.
    21. Andersen, Angela & Garel, Alexandre & Gilbert, Aaron & Tourani-Rad, Alireza, 2022. "Social capital, human capital, and board appointments," Global Finance Journal, Elsevier, vol. 54(C).

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G4 - Financial Economics - - Behavioral Finance

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