Peer Effects in the Trading Decisions of Individual Investors
Financial Management, Forthcoming
41 Pages Posted: 22 Jan 2007 Last revised: 6 May 2009
Date Written: August 2006
Abstract
This study examines for evidence of peer effects, via word-of-mouth communication, in investor trading decisions. It exploits a unique setting in Mainland China in that groups of individual investors are in the same trading room at the time they place their stock orders. We find strong word-of-mouth effects in the trading decisions of these Chinese individual investors. The effect is stronger in investor buys than investor sells of locally-headquartered stocks, while it is stronger in investor sells than investor buys of non-locally headquartered stocks. The results are robust to several alternative interpretations associated with stock visibility and familiarity, within-branch bias, location, local bias, firm size, and calendar effects. In contrast to existing studies, we find the word-of-mouth influence be mainly dominated by the nearest neighbors from the same branch and not by those from different branches located even in the same city. Hence physical proximity that facilitates frequent personal interactions between individual investors does matter for peer effects in trading decisions.
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