Familiarity Breeds Investment

Abstract

We examine the geographic distribution of the shareholders of the U.S. Regional Bell Operating Companies (RBOCs) and document that a customer of an RBOC is more likely to invest in his local company than in an RBOC in another service area. Holdings of the local RBOC tend to be larger than investments in RBOCs that serve other areas. We relate these observations to the general tendency of people to have concentrated portfolios, to the tendency of workers to hold their own company?s stock in their retirement accounts and the home country bias in the international arena. Together, these phenomena provide compelling evidence that people invest in the familiar while often ignoring the principles of portfolio theory. Survey results point in the same direction, and suggest that wishful thinking plays a role in portfolio allocation.

JEL Classification: F36, D10, D81, D84, G11, G15, G23