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Individual Investors and Local Bias

66 Pages Posted: 12 Oct 2005 Last revised: 15 Dec 2009

Mark S. Seasholes

Hong Kong University of Science & Technology (HKUST)

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Date Written: November 30, 2009

Abstract

The paper tests whether individuals have value-relevant information about local stocks (where "local" is de ned 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 signi cantly 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

Seasholes, Mark S. and Zhu, Ning, Individual Investors and Local Bias (November 30, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=817504

Mark S. Seasholes (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong
+852 2358-7668 (Phone)

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

Ning Zhu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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