The impact of information-based familiarity on the stock market

Dehua Shen, Xiao Li (), Andrea Teglio and Wei Zhang ()
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Xiao Li: College of Management and Economics, Tianjin University, China
Wei Zhang: College of Management and Economics, Tianjin University, China

No 2016/08, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: Since the familiarity-based investment plays an important role in portfolio construction, mounting literature has investigated the nature of familiarity and summarized two contradicting hypotheses: information-based trading and behavioral heuristic explanation. However, existing studies leave blank for this issue in Chinese stock market. In this paper, we prove that the familiarity-based investment is driven by information through utilizing the “Approach Your Company, Know Your Investment” activities organized by Shenzhen Stock Exchange. In particular, the empirical results show that investors holding stocks with high degrees of familiarity earn more abnormal returns compared with those investing in stocks with less familiarity and such discrepancy remains in the subsequent 50 trading days. Moreover, we observe that the information-based familiarity results in significant decreases in both liquidity and volatility. All these findings not only complement the existing literature through providing alternative evidence for the nature of familiarity in developing markets, but also have implications for both individual investors and policy makers.

Keywords: Familiarity; Information advantages; Home bias; Psychological bias; Liquidity and volatility (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016
New Economics Papers: this item is included in nep-cfn, nep-cna, nep-fmk and nep-mst
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