Friends Do Let Friends Buy Stocks Actively

Abstract

This research is the first to provide empirical evidence that social interaction is more prevalent amongst active rather than passive investors. While previous empirical work, spearheaded by Hong, Kubik, and Stein (2004), shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey on individual holdings, and buying and selling of financial assets as well as expenditure variables which imply variation in the level of social activity. My findings support a new explanation for the active investing puzzle in which informal communication tends to promote active rather than passive strategies (Han and Hirshleifer 2012).

Keywords: behavioral finance, individual investors, social interaction

JEL Classification: G02, G11