Leonardo Madureira, associate dean for research, associate professor of banking and finance, co-authored new research in the Journal of Finance and Quantitative Analysis on the effect of geography on investment.
The study overcomes a common limitation in the literature linking geography and investments: its inability to make causal inferences about geographic proximity and investment outcomes. Take the “local bias”—the pattern that investors exhibit a preference for investing in firms that are located nearby. This pattern does not imply that the geographic proximity is causing investors to choose the local stocks. The primary endogeneity issue is that firms and investors choose where to locate, and thus there could be unobservable factors driving certain investors and firms to locate in the same place.
Professor Madureira and his co-authors examine proximity through the lens of travel time, rather than geographic distance. They use direct flight introductions as an exogeneous shock to the travel time between mutual funds and firms. They find that a fund invests significantly more in firms that become more proximate following the introduction of direct flights, and that these more proximate investments exhibit superior performance. The results indicate that proximity enhances investors' ability to acquire value-relevant information about firms.