Home Bias in Online Investments: An Empirical Study of an Online Crowdfunding Market
University of Arizona - Eller College of Management
University of Maryland - Robert H. Smith School of Business
January 26, 2014
An extensive literature in economics and finance has documented “home bias,” the tendency that transactions are more likely to occur between parties in the same geographical area, rather than outside. Using data from a large online crowdfunding marketplace and employing a quasi-experimental design, we find evidence that home bias still exists in this virtual marketplace for financial products. More importantly, we find that economic reasons do not fully explain home bias, and that emotions toward one’s home state play an important role. Empirical support for this come from the observations that investors often forgo strictly better alternatives (lower risk and higher return) when investing in home state borrowers; that home state loans offer lower financial returns; and that loan requests with more geography-related words are more likely to attract same state bids. As crowdfunding becomes an alternative and appealing channel for financing, a better understanding of home bias in this new context provides important managerial, practical, and policy implications.
Number of Pages in PDF File: 36
Keywords: home bias; peer-to-peer lending; quasi-experiment; crowdfunding; emotion
Date posted: February 18, 2013 ; Last revised: January 28, 2014
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