Home Away From Home: Economic Relevance and Local Investors

Abstract:     
We identify states that are economically relevant for a firm through textual analysis of the firm's annual financial (10-K) reports and show that institutional investors overweight firms with strong local economic presence and generate superior returns from those investments. This evidence of local over-weighting and superior local performance in economically relevant regions are stronger than those around corporate headquarters, even when those regions are far from the headquarters location. Our results are stronger among more sophisticated institutions and for firms that have speculative features or are harder-to-value. Overall, we demonstrate that economic relevance rather than physical presence has a stronger impact on institutional preferences for local stocks and their local informational advantage.

Number of Pages in PDF File: 76

working papers series