Information Diffusion Effects in Individual Investors' Common Stock Purchases Covet Thy Neighbors' Investment Choices
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. We also 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. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Review of Financial Studies (2007) 20 (4): 1327-1357. doi: 10.1093/revfin/hhm009 citation courtesy of