The Causal Effect of Local Product Market Shocks on Equity Holdings : Evidence from the Airline Industry

We examine how local product market shocks impact individual investors' willingness to own and trade the underlying stock. Using the US airlines industry as our test market, we exploit plausibly exogenous variation generated when airlines supply flights to new markets. We find that active traders increase their ownership in an airline by 10.6% in response to a one standard deviation increase in the airline's local market share supply. Our results are driven by shocks that occur within the first year of investor exposure and are positively related with measures of customer satisfaction. The evidence is most consistent with the view that investment decisions are based on familiarity and investors' perception of product quality