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Social Proximity to Capital: Implications for Investors and Firms

Author

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:

    1. Theresa Kuchler & Dominic Russel & Johannes Stroebel, 2020. "The Geographic Spread of Covid-19 Correlates with Structure of Social Networks as Measured by Facebook," CESifo Working Paper Series 8241, CESifo.
    2. Kuchler, Theresa & Russel, Dominic & Stroebel, Johannes, 2022. "JUE Insight: The geographic spread of COVID-19 correlates with the structure of social networks as measured by Facebook," Journal of Urban Economics, Elsevier, vol. 127(C).
    3. Bailey, Michael & Farrell, Patrick & Kuchler, Theresa & Stroebel, Johannes, 2020. "Social connectedness in urban areas," Journal of Urban Economics, Elsevier, vol. 118(C).
    4. 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]," Review of Corporate Finance Studies, Oxford University Press, vol. 10(4), pages 641-693.
    5. 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).
    6. 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.
    7. 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).
    8. Michael Bailey & Drew Johnston & Martin Koenen & Theresa Kuchler & Dominic Russel & Johannes Stroebel, 2022. "The Social Integration of International Migrants: Evidence from the Networks of Syrians in Germany," CESifo Working Paper Series 9680, CESifo.
    9. Hu, Zhongchen, 2022. "Social interactions and households’ flood insurance decisions," Journal of Financial Economics, Elsevier, vol. 144(2), pages 414-432.
    10. 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.

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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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