Peer Effects in the Trading Decisions of Individual Investors

Financial Management, Forthcoming

41 Pages Posted: 22 Jan 2007 Last revised: 6 May 2009

See all articles by Lilian Ng

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: August 2006

Abstract

This study examines for evidence of peer effects, via word-of-mouth communication, in investor trading decisions. It exploits a unique setting in Mainland China in that groups of individual investors are in the same trading room at the time they place their stock orders. We find strong word-of-mouth effects in the trading decisions of these Chinese individual investors. The effect is stronger in investor buys than investor sells of locally-headquartered stocks, while it is stronger in investor sells than investor buys of non-locally headquartered stocks. The results are robust to several alternative interpretations associated with stock visibility and familiarity, within-branch bias, location, local bias, firm size, and calendar effects. In contrast to existing studies, we find the word-of-mouth influence be mainly dominated by the nearest neighbors from the same branch and not by those from different branches located even in the same city. Hence physical proximity that facilitates frequent personal interactions between individual investors does matter for peer effects in trading decisions.

Suggested Citation

Ng, Lilian and Wu, Fei, Peer Effects in the Trading Decisions of Individual Investors (August 2006). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=958171 or http://dx.doi.org/10.2139/ssrn.958171

Lilian Ng (Contact Author)

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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