Even after adjusting for size and other factors, rural firms trade much less, are covered by fewer analysts, and are owned by fewer institutions than urban firms. Trading costs are higher for rural Nasdaq firms, and volume that can be attributed to market wide factors is lower for rural stocks. The findings add to our understanding of the way that access to information and familiarity affect liquidity.

Urban stocks are local stocks for many more people. Their familiarity to a large number of people ensures many potential investors for the stock. Our rural stocks, however, are local stocks to fewer people. They are likely to capture the attention of a far smaller number of possible stockholders.

It will also be more difficult to obtain information on them for most investors. This suggests to us that the market for urban stocks is likely to be much more liquid than the market for rural stocks.

To classify stocks as urban or rural, the authors follow a number of authors, and use a company’s headquarters as a proxy for its location. They obtain the headquarters locations for companies from Compustat, Nasdaq, and Moody’s.

A stock is defined as an urban stock if the company headquarters is in one of the ten largest metropolitan areas of the United States according to the 2000 census. Companies located in a suburb of one of these cities are also included in the urban portfolio.

The research provides evidence that liquidity is lower for rural stocks than urban stocks.

First, it shows that turnover (the proportion of outstanding shares that is traded during a day) is significantly lower for rural stocks. This is true after adjustment for firm size, industry, analyst coverage, S&P 500 listing, institutional holdings, and insider holdings. It is true for large and small firms, for firms that list on Nasdaq, and for firms that list on the NYSE/Amex.

Second, it shows that trading costs, at least for Nasdaq stocks, are higher for rural firms. This is true for quoted spreads and for effective spreads for small, medium, and large trades. The difference in trading costs is economically significant, amounting to about $1/8 for a $25 stock. Differences in market capitalization, analyst coverage, and industry do not explain the differences in trading costs.

University of Notre Dame - Department of Finance & Business Economics
Paul Schultz (Reseracher), tel. +1 2196313338

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09/09/2004

Tim Loughran and Paul Schultz

research

Urban Policy > Economy knowledge & employment > Urban economy

Competitiveness