Study: Air Traffic Cuts Down Local Investor Bias
SOUTH BEND - A recent study at the University of Notre Dame found that increasing air traffic between two destinations helped companies diversify their portfolios and cut down on local investor bias. Zhi Da, professor of finance at Notre Dame’s Mendoza College of Business, says that when it comes to investment flow between two cities, the geographic distance is less relevant than a streamlined air traffic route.
In an interview with Inside INdiana Business, Da said that although companies may feel more comfortable investing in holdings that are geographically close to them, direct air traffic empowers investors to diversify their portfolios without sacrificing easy access to the location.
“Typically investors suffer from so-called home bias, so they tend to over invest in companies in their hometown. Maybe it's because they're more familiar with these companies or at least they feel more comfortable investing in those companies, but then as a result of this home bias, the typical investor tends to hold a very concentrated portfolio. Because companies in the same region, they're going to suffer the same risk, so by having a home bias they’re not taking full advantage of the diversification benefit.”
Da says his study indicated that when air traffic is strong between two locations, home bias seems to decrease. Rather than investing in areas that were geographically closer, it enabled companies to expand their holdings and invest via a direct air route.
The study aims to include air traffic in its evaluation of home bias, a variable that other studies failed to examine.
“When people talked about home bias they only talked about geographic distance. So, in other words, if I'm an Indiana company, California is going to be more far away from me than another company in Chicago. But I think with air travel, the geographic distance becomes sort of less relevant.”
While companies may be comfortable with investing in their region, the paper found that the sharing of ideas and overall investment flow was more impacted by accessible air traffic rather than geographic location.
“I guess example would be, I mean…the distance between New York and San Francisco can be huge, relative to say from South Bend to Tallahassee, Florida. But I would argue that it's going to be a lot easier to travel between New York and San Francisco than between say South Bend, Indiana, and Tallahassee, Florida, right. So, even though the former pair has a much longer geographic distance than the latter. I think what we're trying to do in our paper is just to look at what happens to all these investment bias as air travel becomes more and more popular that greatly reduce the impact of geographic distance.”