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The Trading Volume Impact of Local Bias: Evidence from a Natural Experiment

Review of Finance, 16, 867-901.

49 Pages Posted: 27 Dec 2009 Last revised: 11 Jun 2013

Heiko Jacobs

University of Mannheim, Finance Department

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: June 1, 2011

Abstract

Exploiting several regional holidays in Germany as a source of exogenous cross-sectional variation in investor attention, we provide evidence that the well-known local bias at the individual level materially affects stock turnover at the firm level. The German setting offers favorable characteristics for this natural experiment. Stocks of firms located in holiday regions are temporarily strikingly less traded, both in statistical and economic terms, than otherwise very similar stocks in non-holiday regions. This negative turnover shock is robust and survives various tests for cross-sectional differences in information release. It is particularly pronounced in stocks less visible to non-local investors, and for smaller stocks disproportionately driven by retail investors. Our findings contribute to research on local bias, determinants of trading activity and limited attention.

Keywords: Local bias, trading activity, investor recognition, investor distraction, holiday effect, natural experiment

JEL Classification: G12, G14

Suggested Citation

Jacobs, Heiko and Weber, Martin, The Trading Volume Impact of Local Bias: Evidence from a Natural Experiment (June 1, 2011). Review of Finance, 16, 867-901. . Available at SSRN: https://ssrn.com/abstract=1527579

Heiko Jacobs (Contact Author)

University of Mannheim, Finance Department ( email )

Mannheim, 68131
Germany
+49-(0)621-181-3453 (Phone)
+49-(0)621-181-1534 (Fax)

HOME PAGE: http://weber.bwl.uni-mannheim.de/mitarbeiter/heiko_jacobs/

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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