Trust and Local Bias

Chishen Wei and Lei Zhang

This paper examines the effect of social trust on local bias. Our evidence suggests that institutional investors located in high trust regions of the United States exhibit lower local bias. Moreover, we find that high trust investors are better diversified, suggesting that trust helps accomplish greater diversification. The results are not due to firm, demographic, or local economic characteristics. Additional analysis reveals that the documented informational advantage in local holdings exists only in low trust regions. We show that this finding is consistent with a trust explanation.