Abstract

The strong bias in favor of domestic securities is a well-documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well-documented asset pricing anomalies. THE STRONG PREFERENCE FOR DOMESTIC EQUITIES exhibited by investors in international markets, despite the well-documented gains from international diversification, 1 remains an important yet unresolved empirical puzzle in financial economics. As French and Poterba ~1991! document, U.S. equity

Citations