Local investors, price discovery, and market efficiency

Shive, Sophie

doi:10.1016/j.jfineco.2011.12.003

Cited by 69 publications

(45 citation statements)

References 27 publications

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“…The coefficient on DD Law in Model 1 is significantly negative, indicating a decline in monthly closing spreads in the postenforcement period. We find significantly negative coefficients on Turnover and Lag Turnover , consistent with prior studies (e.g., Shive [], Christensen, Hail, and Leuz []). We also find that the coefficient on DD Law remains significant (not tabulated) when we estimate separate regressions excluding and including Turnover and Lag Turnover .…”

Section: Resultssupporting

confidence: 91%

“…Consistent with a value discount and return premium for stocks with informed traders, firms with high levels of local trading (measured by the drop in turnover during a local blackout) have lower market‐to‐book values and higher stock returns. Shive [] therefore concludes that local investors possess informational advantages and that they contribute significantly to liquidity and price discovery…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

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Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

Brown

Stice

White

2015

J of Accounting Research

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We examine the influence of mobile communication on local information flow and local investor activity using the enforcement of state-wide distracted driving restrictions, which are exogenous events that constrain mobile communication while driving. By restricting mobile communication across a potentially sizable set of local individuals, these restrictions could inhibit local information flow and in turn, the market activity of stocks headquartered in enforcement states. We first document a decline in Google search activity for local stocks when restrictions take effect, suggesting that constraints on mobile communication significantly affect individuals' information search activity. We further find significant declines in local trading volume when restrictions are enforced. This drop in liquidity is 1) attenuated when laws provide substitutive means of mobile communication and 2) magnified when locals have long car commutes and when their daily commutes overlap with regular exchange hours. Moreover, trading volume suffers the most for local stocks with lower institutional ownership, less analyst coverage, and more intangible information. Additional analyses show lower intraday volume during local commute times when mobile connectivity is constrained. Together, our results suggest that local information and local investors matter in stock markets and that mobile communication is an important mechanism through which these elements operate to affect liquidity and price discovery. This article is protected by copyright. All rights reserved.3 mutual fund managers tend to overweight stocks from their home states and that these stockholdings do not outperform other holdings. 8 Other studies also provide evidence in support of the information-based hypothesis. For instance, Pirinsky and Wang [2006] find evidence of strong return comovement among stocks headquartered in the same geographical This article is protected by copyright. All rights reserved. 12 Recent research has begun to examine the mechanisms through which local information diffuses. Prior studies document that social interaction and word-of-mouth communication among individuals play important roles in the diffusion of local stock information and in individuals' decision to participate in stock markets (Hong, Kubik, and Stein [2004], Ivković and Weisbenner [2007], Shive [2010]). Local media sources and local equity analysts also serve as conduits for the flow of local stock information. For instance, Engelberg and Parsons [2011] find that local newspaper coverage of earnings announcements stimulates local trading. Using exogenous newspaper strikes in several countries, Peress [2014] finds lower share turnover and higher stock return volatility and dispersion in the country's stock market during strike days. 9 Regarding equity analysts, Malloy [2005] finds that local analysts provide more accurate earnings forecasts and stock recommendations for local firms, while Bae, Stulz, and Tan [2008] find that local domestic analysts make more precise forecasts for ...

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Section: Resultssupporting

confidence: 91%

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

Brown

Stice

White

2015

J of Accounting Research

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“…Pirinsky and Wang (2006) find that the price formation in equity markets has a significant geographic component linked to the trading patterns of local individuals, a result which has only recently been confirmed by Korniotis and Kumar (2012) and Liao et al (2012). Similarly, Shive (2012) finds that the investment decisions of local residents contribute disproportionately to stock liquidity and price discovery, while Hong et al (2008) show that, in the presence of locally biased investors, the valuation of a company domiciled in a given region is negatively related to the density of corporate headquarters in that region. Finally, Loughran and Schultz (2004) and Jacobs and Weber (2012) show that a preference for local equity among investors also has a significant impact on firm-level turnover.…”

Section: A Cross-country Perspective On Local Biasmentioning

confidence: 85%

Is local bias a cross-border phenomenon? Evidence from individual investors’ international asset allocation

Baltzer

Stolper

2013

Journal of Banking & Finance

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“…Baik et al (2010), Bodnaruk (2009), Coval andMoskowitz (1999), Coval andMoskowitz (2001), Feng andSeasholes (2004), Ivkovic and Weisbenner (2005), and Massa and Simonov (2006). Moreover, recent studies of Brown et al (2008), Hong et al (2004), Hong et al (2005, Ivkovic and Weisbenner (2007), and Shive (2010) show that local social interaction and neighborhood word-of-mouth effects strongly affect investment decisions. Local bias has been shown to be robust across countries, investor subgroups and sample periods.…”

mentioning

confidence: 97%

“…The findings of Hong et al (2008) suggest that, in the presence of only few local firms competing for investors' money, share prices of spatially close firms are driven up by the excess demand of proximate residents. In a current study based on intra-day data, Shive (2011) exploits large power outages to study the effect of local investor clienteles on pricing efficiency. Her study provides evidence that informed local investors play an important role in information processing and price discovery.…”

mentioning

confidence: 99%

The Trading Volume Impact of Local Bias: Evidence from a Natural Experiment*

Jacobs

Weber

2011

Review of Finance

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Exploiting regional holidays in Germany as a source of exogenous cross-sectional variation in investor attention, we provide evidence that the well-known local bias at the individual level materially affects stock turnover at the firm level. Stocks of firms located in holiday regions are temporarily strikingly less traded than otherwise very similar stocks in non-holiday regions. This negative turnover shock survives comprehensive tests for differences in information release. It appears particularly pronounced in stocks less visible to non-local investors, and for smaller stocks disproportionately driven by retail investors. Our findings contribute to research on local bias, trading activity, and investor distraction.

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Local investors, price discovery, and market efficiency

Cited by 69 publications

References 27 publications

Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

Is local bias a cross-border phenomenon? Evidence from individual investors’ international asset allocation

The Trading Volume Impact of Local Bias: Evidence from a Natural Experiment*

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