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The Geography Of Investment: Informed Trading And Asset Prices

40 Pages Posted: 15 Mar 2000  

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1999

Abstract

This paper uses geography to shed light on the role of asymmetric information in asset pricing. Demonstrating that investors possess significant informational advantages in evaluating nearby investments, we find that active mutual fund managers overweight proximate firms in their portfolios and earn substantial abnormal returns in local holdings. These findings are more pronounced among funds which are small, have few holdings, and operate out of remote locations. Aggregating across all funds, we use the fraction of a stock's shares held by local investors as a measure of the information asymmetry in its investor base. We find that a firm's degree of local ownership is positively related to the cross-section of expected returns, even when controlling for other factors known to explain return variation. The results document new evidence of informed trading and establish a link between such trading and asset prices.

JEL Classification: G12

Suggested Citation

Coval, Joshua D. and Moskowitz, Tobias J., The Geography Of Investment: Informed Trading And Asset Prices (August 1999). CRSP Working Paper No. 502. Available at SSRN: https://ssrn.com/abstract=214138 or http://dx.doi.org/10.2139/ssrn.214138

Joshua D. Coval (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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