Discussion paper

DP14806 Social Proximity to Capital: Implications for Investors and Firms

We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.


Kuchler, T, Y Li, L Peng, J Ströbel and D Zhou (2020), ‘DP14806 Social Proximity to Capital: Implications for Investors and Firms‘, CEPR Discussion Paper No. 14806. CEPR Press, Paris & London. https://cepr.org/publications/dp14806