5 minute read
What’s in Your Browser?
by Aurora Abt
The internet has transformed how we work, learn, shop, and communicate. However, the one thing it cannot do is alter the hard wiring of the human brain. Our propensity to favor what is in our own backyard, or local bias, is apparent in our routine choices, such as where to shop for groceries or choosing a restaurant. Local bias even extends to investor behavior, a fact that intrigued the authors of a new study published in . The study investigated the impact of local bias on the investment process. As well, the results paint a picture of how seamlessly digital resources have become part of consumer behavior.
Twenty years ago, the internet was a new technology, not yet in use by most households. At that time, with less access to information, investors exercised local bias, by favoring Shanthikumar and co-author Professor Sabrina Chi (Texas Tech University) contend that – even information – local bias continues to guide investor this region-based loyalty and does local bias
The study builds on prior research that established the fact that geographic closeness their study, the number of searches within their state for company information was higher than a direct correlation between local bias in online searches and eventual investments. The research
The Impact of Local Bias on Market Activity
local bias in searches and that this local bias suggests that local investor bias can build or temper stock prices. The researchers assert during, and after an earnings announcement. However, there are additional factors at work.
The study presents evidence that around the time of earnings announcements, companies
favored by local investors experienced an unusually high price spread (bid-ask), lower trading volumes, and lower returns than normal. However, prior to earnings announcements, locally favored companies experienced higher bid-ask spreads, higher trading volumes and returns that were in line with the eventual earnings announcement, whether it turned out to be positive, neutral, or negative. The study team calls this factor the local information advantage in that local residents may have been privy to company performance ahead of the announcement, possibly through other residents or the local press, and purchased or sold stock local investor interest experienced higher drift, or a consistent price movement – either up or down. The researchers believe this restrained market reaction is indicative of familiarity bias, as investors seek to own stocks with which they are familiar. This group does not typically trade based on information, such as earnings reports.
Cultivating Local Bias as a Corporate Strategy
The researchers believe local bias and company visibility are strongly related. However, achieved through community outreach. Community interaction and philanthropic efforts are typically and integrate into the community. In fact, the in a region with stronger social ties among local residents and, thus, more local information transfer, may have higher local bias in investor interest, despite being of similar size, analyst coverage, etc.,
How can an organization marry visibility Academic excellence aside, UCI is also one of the largest employers in Orange County, California. Yet it has ties to the community beyond its many employees. From hosting free educational events for elementary and high school students, public access to UCI sports and theatre events, and various outreach programs, UCI has leveraged its resources to build a highly visible presence coupled with a community partnership.
One Orange County-headquartered company recently recognized for its community efforts FORTUNE more than 350,000 employee surveys detailing why their company should make the list.* companies in the country, operates in 100 encouraged to give back to the community and receive paid community service hours. Each of its branches receives yearly funds to donate to
employees go the extra mile by also teaming up with its clients to participate in what is approaching more than 50 American Heart Association Walk Events across America.** Achievements such as as well as in the national press.
The Internet: Key to Information Mining
Having focused on a previously unchartered The researchers believe that image purveyors – including those in management, public relations, and investor relations – tend to focus community efforts close to home. However, the importance span well beyond their geographic area.
For the researchers, browser history proved to be a treasure trove, providing insight into how investors gather information. For companies, it can serve as a resource as they manage their internet presence. Browser history is a tool the researchers believe management has underestimated, and suggest renewed information mining strategies to leverage the potential of this resource in tandem with other key metrics.
Professor Devin Shanthikumar is an assistant professor in the Accounting area. Prior to joining the UCI Paul Merage School of Business, Shanthikumar served on the faculty at the Harvard Business School and wrote cases, which are used in accounting courses across the country. Shanthikumar earned her PhD in Business Administration with a focus in Finance from Stanford’s Graduate School of Business, where she received the Jaedicke Merit Award for outstanding academic performance. She earned her BS in Electrical Engineering and Computer Science from University of California, Berkeley. Shanthikumar also completed a post-doctoral fellowship at Harvard Business School and is a graduate of one of Harvard’s teaching-focused short programs, the Colloquium on Participant Centered Learning. Her research interest is the investing decisions of less sophisticated investors and the impact that these investors have on the market, as well as on the role of financial intermediaries, such as analysts and the press.
