Information Diffusion Effects in Individual Investors' Common Stock Purchases: Covet Thy Neighbors' Investment Choices

We study the relation between households' stock purchases andstock purchases made by their neighbors. A ten percentage pointincrease in neighbors' purchases of stocks from an industryis associated with a two percentage point increase in households'own purchases of stocks from that industry. The effect is considerablylarger for local stocks and among households in more socialstates. Controlling for area sociability, households' and neighbors'investment style preferences, and the industry composition oflocal firms, we attribute approximately one-quarter to one-halfof the correlation between households' stock purchases and stockpurchases made by their neighbors to word-of-mouth communication.