The Geography of Investment: Informed Trading and Asset Prices
Joshua D. Coval
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
Tobias J. Moskowitz
AQR Capital; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Journal of Political Economy, Vol. 109, August 2001
Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments. These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas. Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance. Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return. Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices.
Date posted: August 21, 2001