Individual Investors and Local Bias
66 Pages Posted: 12 Oct 2005 Last revised: 15 Dec 2009
Date Written: November 30, 2009
The paper tests whether individuals have value-relevant information about local stocks (where "local" is dened as being headquartered near where an investor lives). Our methodology uses two types of calendar-time portfolios|one based on holdings and one based on transactions. Portfolios of local holdings do not generate abnormal performance (alphas are zero). When studying transactions, purchases of local stocks signicantly underperform sales of local stocks. The underperformance remains when focusing on stocks with potentially high-levels of information asymmetries. We conclude that individuals do not help incorporate information into stock prices. Our conclusions directly contradict existing studies.
Keywords: Information Aggregation, Individual Investors, Home Bias
JEL Classification: G15, F3, D1
Suggested Citation: Suggested Citation