Trust and Local Bias of Individual Investors

Abstract

It has been widely documented that investment decisions of individual investors exhibit local bias. Yet little is known of how societal forces affect investors' portfolio allocations of local versus nonlocal assets. We propose that social capital, and trust in particular, decreases the local bias of individual investors. Using the trading records of Chinese retail investors, we find that investors with a higher level of trust exhibit less local bias in their stock investments, and this pattern survives under various robustness checks. Furthermore, we document that trust has less effect on local bias of small stocks and potentially informed investors. These findings suggest that trust plays an important role in individual investors' financial decisions, especially for their non-information-driven trading behaviors.