Hong, Kubik and Stein (JFE 2008) find that the price of a stock in the US is decreasing in the ratio of the aggregate book value of listed firms in a region to the aggregate personal income in the same region ("RATIO"), an "only-game-in-town" effect. We first replicate the HKS (2008) study using European data and find an opposite effect, a "game-hoarding" effect. We then investigate the underlying factors of RATIO and find that after controlling for differences in origin of law, investor rights, corruption and Euro adoption, neither a game-hoarding effect nor an only-game-in-town effect is strongly supported in the European case. The results are important in understanding the concept of local bias in a crosscountry framework.
Local bias; Only-game-in-town effect; Game-hoarding effect; Europe