The Geography of Stock Market Participation: The Influence of Communities and Local Firms

45 Pages Posted: 28 Dec 2003

See all articles by Paul A. Smith

Paul A. Smith

Federal Reserve Board of Governors

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Zoran Ivkovich

Michigan State University, Department of Finance

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2003

Abstract

This paper is the first to investigate the importance of geography in explaining equity market participation. We provide evidence to support two distinct local area effects. The first is a community ownership effect, that is, individuals are influenced by the investment behavior of members of their community. Specifically, a ten percentage-point increase in equity market participation of the members of one's community makes it two percentage points more likely that the individual will invest in stocks. We find further evidence that the influence of community members is strongest for less financially sophisticated households and strongest within "peer groups" as defined by age and income categories. The second is that proximity to publicly-traded firms also increases equity market participation. In particular, the presence of publicly-traded firms within 50 miles and the share of U.S. market value headquartered within the community are significantly correlated with equity ownership of individuals. These results are quite robust, holding up in the presence of a wide range of individual and community controls, instrumental variables estimation, the inclusion of individual fixed effects, and specification checks to rule out that the relations are driven solely by ownership of the stock of one's employer.

Keywords: Stock Market Participation, Neighborhood Effects, Peer Effects, Locality, Social Interaction

Suggested Citation

Smith, Paul A. and Brown, Jeffrey R. and Ivkovich, Zoran and Weisbenner, Scott J., The Geography of Stock Market Participation: The Influence of Communities and Local Firms (December 2003). Available at SSRN: https://ssrn.com/abstract=481042 or http://dx.doi.org/10.2139/ssrn.481042

Paul A. Smith

Federal Reserve Board of Governors ( email )

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Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Zoran Ivkovich (Contact Author)

Michigan State University, Department of Finance ( email )

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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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