This paper examines the hypothesis of whether a potential investor’s decision, such as picking a particular stock within a given period, correlates with the decisions of neighbors living in the same area. Using a unique dataset on online and offline individual investors’ trading in Korea, we analyze the buying and selling transactions of 10,000 accounts from February 1999 to December 2005. By employing the herding measure proposed by Lakonishok, Shleifer, and Vishny (1992), we find that individual investors are likely to trade on the same side in a given stock-period. Especially, investors in the same local area show stronger herding than investors across the country. The local herding is salient for offline investors who trade stocks by calling or visiting local brokerage firm branches. In contrast, online investors who place their orders through the Internet show weak local herding. Herding also increases with the stocks that large numbers of individual investors trade. Using OLS regressions, we also find that own-area effects, or correlated trades by individual investors who are geographically close, are stronger compared to other-area effects in both contemporaneous and lagged terms. Interestingly, investors who are male, wealthy, and non-religious tend to invest more in the stock market compared to investors who are female and Protestant.
Keywords: Local Herding; Individual Investors; Online Trading; Word-of-Mouth Effects; Demographic Characteristics; Religion
JEL Classification: G11; G14; G15; G19
