The only game in town

Stock-price consequences of local bias

Harrison Hong, Jeffrey David Kubik, Jeremy C. Stein

Research output: Contribution to journalArticle

79 Citations (Scopus)

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 2008

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Local bias
Stock prices
Book value
Risk tolerance
Investors
Census
U.S. States
Population density

Keywords

  • Local bias
  • Segmented markets

ASJC Scopus subject areas

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

Cite this

The only game in town : Stock-price consequences of local bias. / Hong, Harrison; Kubik, Jeffrey David; Stein, Jeremy C.

In: Journal of Financial Economics, Vol. 90, No. 1, 10.2008, p. 20-37.

Research output: Contribution to journalArticle

Hong, Harrison ; Kubik, Jeffrey David ; Stein, Jeremy C. / The only game in town : Stock-price consequences of local bias. In: Journal of Financial Economics. 2008 ; Vol. 90, No. 1. pp. 20-37.
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