Information Environment and the Geography of Firms and Investors

We develop a model linking stock ownership and returns to the distribution of private information and quality of public information. Supporting the model, we find that the firm’s information environment affects investors’ propensity to hold and trade its stocks, but its effects hinge on investors’ access to private information. Nearby investors with potential access decrease their holdings when private information becomes more dispersed and public information quality improves, whereas distant investors display opposite patterns. Tests exploiting exogenous shocks to firms’ information environments indicate these relations are causal. Moreover, firms’ information environments and proximity to potential investors jointly explain stock returns.