Individual Investors and Local Bias

December 04, 2012

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.