Neighbors Matter: The Geography of Stock Market Participation

44 Pages Posted: 26 Feb 2005

See all articles by Jeffrey R. Brown

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

Paul A. Smith

Federal Reserve Board of Governors

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)

Date Written: March 2005

Abstract

This paper provides direct evidence of a causal link between the stock market participation of individuals and that of the other members of the community in which they reside. We first establish the presence of a robust positive correlation between the probability that an individual owns stock and the level of stock market participation of one's community, as measured by reporting dividend income on tax returns. We also show that conditional on owning stock, an individual is likely to own more (relative to income) when community ownership is higher. These results are robust to a wide range of individual and community controls, including measures of the importance of local firms (which have large independent effects), and specification checks to ensure that the relation is not driven solely by ownership of stock of one's employer. We then provide evidence that this community effect is at least partially driven by word of mouth by showing that the effect is stronger in more sociable communities. To demonstrate causality, we employ a novel instrumental variables strategy that uses the stock ownership rates of the non-local parents of one's local peers to instrument for community ownership. Further, we also control for heterogeneity in risk preferences by including individual-level fixed effects. We conclude that a ten percentage-point increase in equity market participation of the members of one's community makes it four to five percentage points more like the individual will invest in stocks. We also provide estimates of a direct parental effect, as well as suggestive evidence that one's home state may have lasting effects on one's stock market participation.

Keywords: community effect, peer effect, stock market participation

JEL Classification: G11

Suggested Citation

Brown, Jeffrey R. and Smith, Paul A. and Ivkovich, Zoran and Weisbenner, Scott J., Neighbors Matter: The Geography of Stock Market Participation (March 2005). Available at SSRN: https://ssrn.com/abstract=673510 or http://dx.doi.org/10.2139/ssrn.673510

Jeffrey R. Brown (Contact Author)

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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Paul A. Smith

Federal Reserve Board of Governors ( email )

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Zoran Ivkovich

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
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Scott J. Weisbenner

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

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HOME PAGE: http://business.illinois.edu/weisbenn/

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