Get access

Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments

Authors

  • ZORAN IVKOVIĆ,

    1. 1Department of Finance, University of Illinois at Urbana-Champaign
    Search for more papers by this author
  • SCOTT WEISBENNER

    1. 1Department of Finance, University of Illinois at Urbana-Champaign
    2. 2NBER
    Search for more papers by this author
    • Both authors are from the Department of Finance, University of Illinois atUrbana-Champaign. Scott Weisbenner is with the NBER. We would like to extend our gratitude to an anonymous discount broker for providing the data on individual investors' positions, trades, and demographics. Special thanks to Terry Odean for his help in obtaining and understanding the data set. We thank Alok Kumar, Allen Poteshman, Mark Seasholes, and an anonymous referee for useful insights and helpful discussions. Both authors acknowledge the financial support from the College Research Board at the University of Illinois at Urbana-Champaign. Finally, we thank seminar participants at the University of Illinois and the 2003 Western Finance Association Meetings for their comments and constructive suggestions.


ABSTRACT

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).

Ancillary