LOCAL IPOS AND RETAIL INVESTOR TRADING

This paper examines how salient events affect retail investors’ trading behavior. Using data on households’ trading records from a large discount broker between 1991 and 1996, I find that Initial Public Offerings (IPOs) significantly increase the trading activities of local retail investors of stocks in the same industry over the subsequent year. The effect is stronger for less sophisticated investors and investors who live closer to the IPO firm’s headquarters, consistent with salience as the channel. I also find that retail investors are net buyers of stocks right after the local IPOs and become net sellers after a year and that such trading behavior is not wealth enhancing. These results suggest that investors learn through trading and undo their actions after realizing poor choices. Finally, I find that stock purchases in the same industry tend to be of local firms, suggesting these investors also display a local bias.

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