The only game in town: Stock-price consequences of local bias

Harrison Hong, Jeffrey D. Kubik, Jeremy C. Stein

Research output: Contribution to journalArticle

88 Scopus citations

Abstract

Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. Using data on U.S. states and Census regions, we find clear-cut support for this proposition. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density-e.g., the Deep South-are home to relatively few firms per capita, which leads to higher stock prices via an "only-game-in-town" effect.

Original languageEnglish (US)
Pages (from-to)20-37
Number of pages18
JournalJournal of Financial Economics
Volume90
Issue number1
DOIs
StatePublished - Oct 1 2008

Keywords

  • Local bias
  • Segmented markets

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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