History Versus Geography: The Role of College Interaction in Portfolio Choice and Stock Market Prices

48 Pages Posted: 9 Apr 2005

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

Abstract

We study the link between portfolio choice and different college-based interaction - defined as the one that relates the portfolio choice of an investor to that of the other investors who went to the same college. We explain it in terms of a common cultural imprinting and the development of long-term friendship and alumni network and we directly quantify this bonding effect. We use a new dataset with information on portfolio choice - broken down at the stock level - wealth, income and demographic characteristics of a big panel of investors as well as information on the college they attended and their family situation at the time.

We compare college-based interaction to other forms of social interaction, such as educational, professional and geographical interaction, properly controlling for all the standard motivations of portfolio theory, such as hedging of non-financial income risk, familiarity and information effects, wealth and income effect, a host of demographic, geographic and professional dummies, trend-chasing and momentum behavior. All the different sources of social interaction significantly affect stock-picking as well as the choice between direct and delegated investment, both statistically and economically. College-based interaction is, however, the most important of them and the third single most important factor affecting stock picking. The impact of college-based interaction aggregates at the market level and affects stock prices. For each company, we construct measures of the degree of strength of college-based interaction among shareholders. We show that an increase in the strength of interaction reduces stock return and volatility. This can be rationalized in terms of recent theories on the impact of dispersion of beliefs in the presence of short-sale constraints.

Keywords: Portfolio choice, education, individual investors, herding

JEL Classification: G11, G12, I21

Suggested Citation

Massa, Massimo and Simonov, Andrei, History Versus Geography: The Role of College Interaction in Portfolio Choice and Stock Market Prices (February 2005). EFA 2005 Moscow Meetings Paper. Available at SSRN: https://ssrn.com/abstract=675776 or http://dx.doi.org/10.2139/ssrn.675776

Massimo Massa

INSEAD - Finance ( email )

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Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

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East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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