Working Paper: NBER ID: w27299
Authors: Theresa Kuchler; Yan Li; Lin Peng; Johannes Stroebel; Dexin Zhou
Abstract: We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.
Keywords: Social Proximity; Institutional Investors; Capital Markets
JEL Codes: G2; G3; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social connectedness (Z13) | Investment behavior (G11) |
| Social connectedness (Z13) | Institutional ownership (G32) |
| Social connectedness (Z13) | Market-to-book ratio (G32) |
| Social connectedness (Z13) | Tobin's Q (G19) |
| Social connectedness (Z13) | Effective spreads (G19) |
| Social connectedness (Z13) | Amihud illiquidity measure (G33) |
| Social proximity to capital (R53) | Access to capital (O16) |