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Trust and Local Bias

Published online by Cambridge University Press:  29 October 2019

Chishen Wei Open the ORCID record for Chishen Wei [Opens in a new window]  and
Lei Zhang
Chishen Wei*
Affiliation:
Wei, cswei@smu.edu.sg, Singapore Management University Lee Kong Chian School of Business
Lei Zhang
Affiliation:
Zhang, l.zhang@business.uq.edu.au, University of Queensland School of Business and City University of Hong Kong College of Business
*
Wei (corresponding author), cswei@smu.edu.sg
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Abstract

In this article, we examine the effect of social trust on local bias. Our evidence suggests that institutional investors located in high-trust regions of the United States exhibit lower local bias. Moreover, we find that high-trust investors are better diversified, suggesting that trust helps accomplish greater diversification. The results are not due to firm, demographic, or local economic characteristics. Additional analysis reveals that the documented informational advantage in local holdings exists only in low-trust regions. We show that this finding is consistent with a trust explanation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2211 - 2245
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank Jennifer Conrad (the editor) and Feng Jiang (the referee) for comments that significantly improved the paper. We also thank Stephen Dimmock, Chuan Yang Hwang, Wenxi Jiang, Jun-koo Kang, Christine Kaufmann, Daniel Ruf, Tao Shu, Johan Sulaeman, Sheridan Titman, K. C. John Wei, Joe Zhang, and participants at the 2014 Australasian Finance & Banking Conference, the 2015 China International Conference in Finance, the 2016 European Finance Association meeting, ESSEC Business School, Nanyang Business School, Singapore Scholars Symposium, and Thammasat Business School for helpful comments. We thank Johan Sulaeman for providing data on local religiosity. This paper was written while both authors were at the Nanyang Technological University. The authors acknowledge support from a Singapore MOE Tier 1 research grant. All errors are our own.

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