Review of Finance Advance Access originally published online on July 17, 2009
Review of Finance 2009 13(4):629-656; doi:10.1093/rof/rfp014
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Proximity Always Matters: Local Bias When the Set of Local Companies Changes*
University of Notre Dame
I analyze the portfolios of individual investors who have changed their place of residence. As distance from a company they invest in changes, investors adjust their portfolio composition. The farther investors move away from the closest establishment of a company in their portfolio, the more of its shares they sell compared to investors who do not move. Among the companies that investors held before the move, after moving, investors abnormally increase their ownership in companies closer to their new location; these companies provide them with higher risk-adjusted returns than companies in which they kept holdings unchanged or abnormally reduced holdings.
JEL Classification: G11
* Previous versions of this paper circulated under the titles "Look homeward, investor" and "Proximity Always Matters: Evidence from Swedish Data". I thank Peter Englund, Kai Li (a discussant), Marco Pagano (the editor), Raghu Rau, Peter Schotman, Andrei Simonov, David Stolin, Stefan Straetmans, Roald Versteeg, Per Östberg, seminar participants at the Stockholm School of Economics, University of Amsterdam, Norwegian School of Economics, Norwegian School of Management, New Economic School (Moscow), University of Maastricht, WFA meeting in 2003, EFA meeting in 2004, EFMA meeting in 2003 and especially two anonymous referees for their helpful comments. I am thankful to Sven-Ivan Sundqvist for providing the data. Financial support from Stiftelsen Bankforskningsinstitutet is gratefully acknowledged.