Social Proximity to Capital: Implications for Investors and Firms

56 Pages Posted: 9 Jun 2020

See all articles by Theresa Kuchler

Theresa Kuchler

New York University (NYU)

Yan Li

Baruch College, CUNY

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

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Date Written: June 2020

Abstract

We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.

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Suggested Citation

Kuchler, Theresa and Li, Yan and Peng, Lin and Stroebel, Johannes and Zhou, Dexin, Social Proximity to Capital: Implications for Investors and Firms (June 2020). NBER Working Paper No. w27299, Available at SSRN: https://ssrn.com/abstract=3621804

Theresa Kuchler (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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Yan Li

Baruch College, CUNY ( email )

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Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

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New York, NY 10010
United States

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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