Neighbors Matter: Causal Community Effects and Stock Market Participation

31 Pages Posted: 27 Jun 2007 Last revised: 26 Jun 2010

See all articles by Paul A. Smith

Paul A. Smith

Federal Reserve Board of Governors

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Zoran Ivkovich

Michigan State University, Department of Finance

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2007

Abstract

This paper establishes a causal relation between an individual's decision of whether to own stocks and average stock market participation decision of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's non-native neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time-varying individual and community controls, and state-by-year effects, rules out alternative explanations. To further establish that word-of-mouth communication drives this causal effect, we show that the results are stronger in more sociable communities.

Suggested Citation

Smith, Paul A. and Brown, Jeffrey R. and Ivkovich, Zoran and Weisbenner, Scott J., Neighbors Matter: Causal Community Effects and Stock Market Participation (June 2007). NBER Working Paper No. w13168. Available at SSRN: https://ssrn.com/abstract=993070

Paul A. Smith

Federal Reserve Board of Governors ( email )

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Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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Zoran Ivkovich

Michigan State University, Department of Finance ( email )

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Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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