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

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...

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Bibliographic Details
Published in:Journal of financial economics 2008-10, Vol.90 (1), p.20-37
Main Authors: Hong, Harrison, Kubik, Jeffrey D., Stein, Jeremy C.
Format: Article
Language:English
Subjects:
Asset valuation
Bias
Book value
Financial ratios
Local bias
Local bias Segmented markets
Local economy
Market structure
Regional disparities
Regional stocks
Risk
Segmented markets
Stock prices
Studies
U.S.A
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2007.11.006