Do Individual Investors Have Asymmetric Information Based on Work Experience?
Norwegian School of Economics (NHH) - Department of Finance and Management Science
Hans K. Hvide
University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
July 11, 2010
Journal of Finance, Forthcoming
Using a novel dataset covering all individual investors' stock market transactions in Norway over 10 years, we analyze whether individual investors have a preference for professionally close stocks, and whether they make excess returns on such investments. After excluding own-company stock holdings, investors hold on average 11% of their portfolio in stocks within their two-digit industry of employment. Given the poor hedging properties of professionally close stocks, one would expect such investments to be associated with asymmetric information and abnormally high returns. In contrast, all our estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for why individuals excessively trade in professionally close stocks.
Number of Pages in PDF File: 60
Keywords: Asymmetric information, Behavioral finance, Familiarity, Household finance, Informed trading, Overconfidence
JEL Classification: D83, G11, J24Accepted Paper Series
Date posted: June 29, 2009 ; Last revised: July 12, 2010
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