Local Returns and Beliefs About the Stock Market

This study documents how investors extrapolate from recent stock returns of locally headquartered firms when forming beliefs about aggregate stock market outcomes. Consistent with studies on the equity home bias, we find that the responsiveness to local information is a function of proximity. While investors may value local information, we do not find evidence that these effects are sensitive to the informativeness of past local returns to predict outcomes on the aggregate stock market. Our findings suggest that beliefs about information contained in public signals vary systematically with geography, which has been suggested as an important driver of the local bias in equity markets