51 Pages Posted: 19 Jul 2005
Date Written: July 2005
Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. We test this proposition using data on U.S. Census regions and states, and find clear-cut support for it. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density - e.g., the Deep South - are home to relatively few firms per capita, which leads to higher stock prices via an "only-game-in-town" effect. This effect is especially pronounced for smaller, less visible firms, where the impact of location on stock prices is roughly 12 percent.
Suggested Citation: Suggested Citation
Kubik, Jeffrey D. and Hong, Harrison G. and Stein, Jeremy C., The Only Game in Town: Stock-Price Consequences of Local Bias (July 2005). Harvard Institute of Economic Research Discussion Paper No. 2077. Available at SSRN: https://ssrn.com/abstract=756807 or http://dx.doi.org/10.2139/ssrn.756807