Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments

Abstract

Using a data set on a large number of retail investors from 1991-96, we find that households exhibit a strong preference for local investment - the average household invests nearly a third of their portfolio in firms headquartered within 250 miles. We test whether this locality bias is driven by information or by simple familiarity. The average household generates an additional return of 3.7% per year from its local holdings relative to its non-local holdings, suggesting local investors are able to exploit local knowledge. The excess return to investing locally is even larger among stocks not in the S&P 500 index (firms where informational asymmetries between local and non-local investors may be largest), while there is no excess return earned by households that invest in local S&P 500 stocks. Moreover, the patterns in turnover, herding, and excess demand across local and non-local trades are suggestive of a gradual dissemination of information.