Individual Investors and Local Bias
MARK S. SEASHOLES and NING ZHU
∗

ABSTRACT

The paper tests whether individuals have value-relevant information about local stocks (where “local” is defined as being headquartered near where an investor lives). Our methodology uses two types of calendar-time portfolios—one based on holdings and one based on transactions. Portfolios of local holdings do not generate abnormal performance (alphas are zero). When studying transactions, purchases of local stocks significantly underperform sales of local stocks. The underperformance remains when focusing on stocks with potentially high levels of information asymmetries. We conclude that individuals do not help incorporate information into stock prices. Our conclusions directly contradict existing studies.

Keywords: Information Aggregation, Individual Investors, Home Bias JEL number: G15, F3, D1

∗

Seasholes is with Hong Kong University of Science and Technology (HKUST), and Zhu is with University of

California at Davis. We thank a large discount broker, Brad Barber, and Terry Odean for providing the data used in this study. Terry Hendershott, Chris Hennessy, Gur Huberman, Alok Kumar, Tobias Moskowitz, Terry Odean, and Richard Stanton have given many helpful comments. Cynthia Qi Pan provided excellent research assistance. We are especially grateful to Brad Barber, who has been instrumental in the development of this paper.

This paper studies the geography of individual investors’ portfolios. Recent research provides ample evidence that individuals tilt their portfolios towards local stocks. For example, the typical U.S. household has about 30% of its portfolio invested in stocks headquartered within a 250 mile radius of the family’s home. On average, only 12% of all firms (the market) are headquartered within the same radius. In Finland, the median non-Helsinki-headquartered firm has 12% greater weight among investors in its municipality than it does among all Finnish