Home away from Home: Geography of Information and Local Investors

Abstract

We develop a 10K-based measure of spatial variation in the availability of value-relevant information that reflects the multi-dimensional nature of firm location. Spatially distributed information generates locationbased information asymmetries that affect institutional portfolio decisions and performance. Institutions overweigh firms with greater local economic exposure and earn superior returns on corresponding trades, even for firms not headquartered locally. These patterns are stronger among harder-to-value stocks. Consistent with local informational advantage, local investor performance increases with the local exposure of individual stock holdings and her portfolio as a whole, and more so when her portfolio is more heavily tilted toward local stocks.

Foreign market portfolio concentration and performance

“…Bernile et al. () determine that local investors have an informational advantage over nonlocal investors. Ferreira, Matos, Pereira, and Pires () argue that domestic institutions have trading patterns consistent with information advantages.…”

“…In addition, I follow Bernile, Kumar, and Sulaeman (2009), Coval and Moskowitz (2001), and Baik, Kang, and Kim (2010) and measure investor learning capacity based on investor geographical proximity. Since there is quite an overlap in geographical and cultural proximity, I also measure learning capacity based on investor cultural closeness as documented by Hofstede (2003Hofstede ( , 2018 and Hofstede and Hofstede (2004).…”

Behavioral Finance: Household Investment and Borrowing Decisions

“…However, against this backdrop, empirical studies with only a few exceptions (e.g., Bernile et al, 2015) show that households do not earn positive abnormal returns based on their supposedly superior information (Seasholes and Zhu, 2010;Doskeland and Hvide, 2011). The only way to interpret this evidence is to suggest that if households under-diversify because they believe in their informational advantage, they make a financial mistake, possibly because of overconfidence.…”

Market Power in the Portfolio: Product Market Competition and Mutual Fund Performance

“…With the passage of the Sarbanes-Oxley Act (SOX) in 2002 firms face enhanced requirements in their financial reporting which generally improves the information set of investors. This makes it less likely for informed investors to fully reap the profits from their privately obtained information (e.g., Bernile, Kumar, and Sulaeman (2015)). I therefore expect a stronger deterioration in fund performance around SOX for funds with larger monopoly bets before the event.…”