Social Proximity to Capital: Implications for Investors and Firms

Theresa Kuchler, Yan Li, Lin Peng, Johannes Stroebel and Dexin Zhou

No 27299, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.

JEL-codes: G2 G3 G4 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-sbm and nep-soc
Note: AP CF EFG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Theresa Kuchler & Yan Li & Lin Peng & Johannes Stroebel & Dexin Zhou & Itay Goldstein, 2022. "Social Proximity to Capital: Implications for Investors and Firms," The Review of Financial Studies, vol 35(6), pages 2743-2789.

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Journal Article: Social Proximity to Capital: Implications for Investors and Firms (2022)
Working Paper: Social Proximity to Capital: Implications for Investors and Firms (2020)
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