Information Diffusion Effects in Individual Investors ’ Common Stock Purchases: Covet Thy Neighbors

We study the relation between households ’ stock purchases and stock purchases made by their neighbors. A ten percentage point increase in neighbors ’ purchases of stocks from an industry is associated with a two percentage point increase in households’ own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states. Controlling for area sociability, households ’ and neighbors ’ investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households ’ stock purchases and stock purchases made by their neighbors to word-of-mouth communication. (JEL D14, D83, G11) Although individuals collectively hold about one-half of the U.S. stock market, information diffusion effects among individual investors—the relation between the investment choices made by an individual investor’s neighborhood and the investor’s own investment choices—have received relatively little attention in the academic literature, probably because of the lack of detailed data. If present, such effects undoubtedly can affec