Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments
- Author(s): ZORAN IVKOVIĆ, SCOTT WEISBENNER
- Published: Jul 20, 2005
- Pages: 267-306
- DOI: 10.1111/j.1540-6261.2005.00730.x
Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that households exhibit a strong preference for local investments. We test whether this locality bias stems from information or from simple familiarity. The average household generates an additional annualized return of 3.2% from its local holdings relative to its nonlocal holdings, suggesting that local investors can exploit local knowledge. Excess returns to investing locally are even larger among stocks not in the S&P 500 index (firms for which information asymmetries between local and nonlocal investors may be largest).