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 CHAMPAIGN -- Keeping
up with the Joneses apparently includes keeping up with their stock
market picks, researchers at the University of Illinois have found.
Zoran Ivkovich and Scott Weisbenner, both professors of
finance in the
College of Business, studied the stocks purchased by 35,673 U.S.
households between 1991 and 1996.
They found that social networks played a role in determining what
stocks investors would buy. A 10 percent increase in neighbors'
purchases of stock in a particular industry was associated with a 2
percent increase in stock purchases in the same industry by those
living nearby.
The findings suggest that Americans rely on friends and neighbors
for investment advice in addition to company annual reports,
newspaper and television coverage and other sources of information.
This differed from the investment habits of other countries. In
China, for example, investment choices were largely driven by a
"herd" reaction to locally available news, according to academic
research, while investors in Finland were swayed by such concerns as
the ethnic origin of a company's CEO.
The "neighborhood effect" in picking stocks in America was
especially strong for companies headquartered within 50 miles of a
household. "Not only do investors tend disproportionately to invest
locally, but there are also strong information diffusion effects in
their neighborhood," Ivkovich and Weisbenner wrote.
Another variable factor was population density. In large
metropolitan areas, investors more readily followed their neighbors'
investment choices. Closer physical proximity and more extensive
social networks encourage a freer exchange of ideas and tips on
investments.
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 The Illinois
researchers examined stocks purchased through a discount brokerage
on the New York Stock Exchange, American Stock & Options Exchange
(AMEX) and National Association of Securities Dealers Automated
Quotations (NASDAQ).
Looking at 23 quarters between 1991 and 1996, Ivkovich and
Weisbenner compiled a database of more than 2.6 million stock
purchases in 14 industry groups, including oil and gas, medicine and
biotechnology, finance, transportation and utilities.
Their working paper is titled "Information Diffusion Effects in
Individual Investors' Common Stock Purchases: Covet Thy Neighbors'
Investment Choices."
[Text copied from
University
of Illinois news release]
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