RFS Advance Access originally published online on January 29, 2007
Review of Financial Studies 2007 20(4):1327-1357; doi:10.1093/revfin/hhm009
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Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices
Michigan State University
University of Illinois at Urbana-Champaign and NBER
Address correspondence to Zoran Ivkovic, Department of Finance, The Eli Broad Graduate School of Management, Michigan State University, 315 Eppley Center, East Lansing, MI 48824-1121, or e-mail: ivkovich{at}msu.edu
Address correspondence to Scott Weisbenner, Department of Finance, University of Illinois at Urbana-Champaign, 340 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, or e-mail: weisbenn{at}uiuc.edu
JEL: D14, D83, G11
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Abstract |
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We study the relation between households' stock purchases and stock purchases made by their neighbors. A ten percentage point increase in neighbors' purchases of stocks from an industry is associated with a two percentage point increase in households' own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states. Controlling for area sociability, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households' stock purchases and stock purchases made by their neighbors to word-of-mouth communication.
We extend our gratitude to an anonymous discount broker for providing the data on individual investors' positions, trades, and demographics. Special thanks go to Terry Odean for his help in obtaining and understanding the data set. Both authors acknowledge the financial support from the College Research Board at the University of Illinois at Urbana-Champaign. We thank Jean Roth of the NBER for assistance with the 1990 Census data. Finally, we thank seminar participants at the University of Florida and the University of Illinois for their comments and feedback. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.