Local does as local is: Information content of the geography of individual investors' common stock investments

Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that households exhibit a strong preference for local investments. We test whether this locality bias stems from information or from simple familiarity. The average household generates an additional annualized return of 3.2% from its local holdings relative to its nonlocal holdings, suggesting that local investors can exploit local knowledge. Excess returns to investing locally are even larger among stocks not in the S&P 500 index (firms for which information asymmetries between local and nonlocal investors may be largest).