Neighbors Matter: Causal Community Effects and Stock Market Participation

30 Pages Posted: 3 Mar 2007

See all articles by Paul A. Smith

Paul A. Smith

Board of Governors of the Federal Reserve System

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Zoran Ivkovich

Michigan State University, Department of Finance

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2007

Abstract

This paper establishes a causal relation between an individual's decision of whether to own stocks and average stock market participation decision of the individual's community. We instrument for the average ownership of an individual's community with lagged average ownership of the states in which one's non-native neighbors were born. Combining this instrumental variables approach with controls for individual and community fixed effects, a broad set of time-varying individual and community controls, and state-by-year effects, rules out alternative explanations. To further establish that word-of-mouth communication drives this causal effect, we show that the results are stronger in more sociable communities.

Keywords: community effects, stock ownership

JEL Classification: D14, D83, G11

Suggested Citation

Smith, Paul A. and Brown, Jeffrey R. and Ivkovich, Zoran and Weisbenner, Scott J., Neighbors Matter: Causal Community Effects and Stock Market Participation (May 27, 2007). Available at SSRN: https://ssrn.com/abstract=966334 or http://dx.doi.org/10.2139/ssrn.966334

Paul A. Smith

Board of Governors of the Federal Reserve System ( email )

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Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

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Zoran Ivkovich

Michigan State University, Department of Finance ( email )

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Scott J. Weisbenner (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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