Trust and Local Bias

Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2211 - 2245

77 Pages Posted: 2 Sep 2014 Last revised: 25 Aug 2021

See all articles by Chishen Wei

Chishen Wei

Hong Kong Polytechnic University - School of Accounting and Finance

Lei Zhang

City University of Hong Kong (CityU)

Date Written: May 24, 2019

Abstract

This paper examines the effect of social trust on local bias. Our evidence suggests that institutional investors located in high-trust regions of the United States exhibit lower local bias. Moreover, we find that high-trust investors are better diversified, suggesting that trust helps accomplish greater diversification. The results are not due to firm, demographic, or local economic characteristics. Additional analysis reveals that the documented informational advantage in local holdings exists only in low-trust regions. We show that this finding is consistent with a trust explanation.

Keywords: Trust, Local Bias, Institutional Investors, Cultural economics

JEL Classification: G11, G12, G23, Z1

Suggested Citation

Wei, Chishen and Zhang, Lei, Trust and Local Bias (May 24, 2019). Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2211 - 2245, Available at SSRN: https://ssrn.com/abstract=2489911 or http://dx.doi.org/10.2139/ssrn.2489911

Chishen Wei (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Lei Zhang

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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