Local Bias and Indisputable Preference

Abstract

Using a panel data set that provides detailed information on investors' stockholding, this paper studies the relationship between local bias and risk-adjusted portfolio return while controlling for alternative exogenous determinants within Sweden between the years of 2000 and 2007. Existing studies in local bias literature have suggested two major explanations behind local bias, seeing it either as a result of information advantage or familiarity attributes such as companies' language, culture, distance, size etc. This paper documents that investors do not outperform the fully diversified market portfolio by investing locally. Therefore, it invokes the possibility that local bias may merely be indisputable preference that investors choose local firms whenever they face equal or nearly equal profits.

Keywords: Local Bias, Indisputable Preference, Panel Data Analysis

JEL Classification: G11, G12, G23