The Journal of Finance

Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments

Published: 07/20/2005   |   DOI: 10.1111/j.1540-6261.2005.00730.x

ZORAN IVKOVIĆ, SCOTT WEISBENNER

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).

Capital Gains Tax Rules, Tax‐loss Trading, and Turn‐of‐the‐year Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00328

James M. Poterba, Scott J. Weisbenner

Changes in the capital gains tax rules facing individual investors do not affect the incentives for “window dressing” by institutional investors, but they can affect the incentives for year‐end tax–induced trading by individual investors. Empirical evidence for the 1963 to 1996 period suggests that when the tax law encouraged taxable investors who accrued losses early in the year to realize their losses before year‐end, the correlation between early year losses and turn‐of‐the‐year returns was weaker than when the law did not provide such an early realization incentive. These findings suggest that tax‐loss trading contributes to turn‐of‐the‐year return patterns.

Local Dividend Clienteles

Published: 03/21/2011   |   DOI: 10.1111/j.1540-6261.2010.01645.x

BO BECKER, ZORAN IVKOVIĆ, SCOTT WEISBENNER

We exploit demographic variation to identify the effect of dividend demand on corporate payout policy. Retail investors tend to hold local stocks and older investors prefer dividend‐paying stocks. Together, these tendencies generate geographically varying demand for dividends. Firms headquartered in areas in which seniors constitute a large fraction of the population are more likely to pay dividends, initiate dividends, and have higher dividend yields. We also provide indirect evidence as to why managers may respond to the demand for dividends from local seniors. Overall, these results are consistent with the notion that the investor base affects corporate policy choices.

Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01261.x

JEFFREY R. BROWN, NELLIE LIANG, SCOTT WEISBENNER

We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after‐tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts.

Neighbors Matter: Causal Community Effects and Stock Market Participation

Published: 05/09/2008   |   DOI: 10.1111/j.1540-6261.2008.01364.x

JEFFREY R. BROWN, ZORAN IVKOVIĆ, PAUL A. SMITH, SCOTT WEISBENNER

This paper establishes a causal relation between an individual's decision whether to own stocks and average stock market participation 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 nonnative 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‐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.