Local Investors, Price Discovery, And Market Efficiency
This paper examines the effect of locally informed investors on market efficiency and stock prices using large power outages, which are exogenous events that constrain trading. Turnover in stocks headquartered in an outage area with 0.5% of U.S. electrical customers drops by 4-8% on the first full day of the outage, and bid-ask spreads narrow by 2%. Firm-specific price volatility is 3.6% lower on blackout dates, and the R-square of intraday returns regressed on the market portfolio is 3.8% higher. This effect is three times larger for soft information firms.