Working Paper: NBER ID: w10436
Authors: Zoran Ivkovi; Scott Weisbenner
Abstract: Using data on stock purchases individual investors made through a discount broker from 1991 to 1996, we study information diffusion effects the relation between household investment choices and those 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 the household's own purchases of stocks from that industry, with the effect considerably larger for purchases of local stocks. The presence of information diffusion effects is robust to controls for potential inside information effects and to household fixed effects. Upon controlling for aggregate trading patterns, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-third to one-half of the overall diffusion effect to word-of-mouth communication. Disentangling the overall diffusion effect suggests that the significant relation between our measures of information diffusion and subsequent industry-level returns appears to be driven by its word-of-mouth component.
Keywords: information diffusion; individual investors; stock purchases; neighborhood effects
JEL Codes: D83; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Neighbors' purchases of stocks from a particular industry (G34) | Households' own purchases from that industry (D19) |
| Neighbors' purchases of local stocks (G59) | Households' own purchases of local stocks (D14) |
| Word-of-mouth communication (L96) | Overall diffusion effect (C22) |
| Information diffusion (D85) | Subsequent industry-level returns (L19) |