Trust and Local Bias
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2211 - 2245
77 Pages Posted: 2 Sep 2014 Last revised: 25 Aug 2021
Date Written: May 24, 2019
Abstract
This paper examines the effect of social trust on local bias. Our evidence suggests that institutional investors located in high-trust regions of the United States exhibit lower local bias. Moreover, we find that high-trust investors are better diversified, suggesting that trust helps accomplish greater diversification. The results are not due to firm, demographic, or local economic characteristics. Additional analysis reveals that the documented informational advantage in local holdings exists only in low-trust regions. We show that this finding is consistent with a trust explanation.
Keywords: Trust, Local Bias, Institutional Investors, Cultural economics
JEL Classification: G11, G12, G23, Z1
Suggested Citation: Suggested Citation
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