Do Investors Buy What They Know? Product Market Choices and Investment Decisions
London Business School; Centre for Economic Policy Research (CEPR)
Juhani T. Linnainmaa
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
March 20, 2012
Chicago Booth Research Paper No. 10-24
AFA 2012 Chicago Meetings Paper
Fama-Miller Working Paper
This paper shows individuals’ product market choices influence their investment decisions. Using microdata from the brokerage and automotive industries, we find a strong positive relation between customer relationship, ownership of a company, and size of the ownership stake. Investors also are more likely to purchase and less likely to sell shares of companies they frequent as customers. These effects are stronger for individuals with longer customer relationships. A merger-based natural experiment supports a causal interpretation of our results. We find weaker causality in the other direction: inheritances and gifts of stocks have only a modest effect on individuals’ patronage decisions. A setup in which customer-investors regard stocks as consumption goods, not just as investments, seems to best explain our results.
Number of Pages in PDF File: 59
Keywords: Investor behavior, portfolio choice, product market, ownership
JEL Classification: G11, G24, D83working papers series
Date posted: September 3, 2010 ; Last revised: March 24, 2012
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