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Headquarter Location and Investor Connectedness – A Study into the Location Effect of New Zealand Stocks

The debate between the traditional financial theorist and the ‘new age’ behavioural finance theorists is one of much contention. Many have shown that investor sentiment in many ways shows irrationality that kills much of the previous research into the equity premium and efficient market hypothesis. We add to this debate with analysis of what we call the ‘location effect’. This location effect is such that individual investors have sentiment or feel ‘connected’ to firms located in the same geographical location as them, therefore causing co-movement based on locality. We test our hypothesis on the New Zealand Stock Exchange in order to show that this location effect exists within a small market setting. Our results show some support in favour of this location effect, especially in regards to the relocation of firm headquarters.