The Causal Effects of Proximity on Investment: Evidence from Flight Introductions
We address fundamental endogeneity issues inherent in the local bias literature by using direct flight introductions as an exogenous shock to the travel time between mutual funds and firms, thereby allowing us to understand the causal effects of proximity on fund investment decisions and performance. We find that a fund invests significantly more in firms that become more proximate due to the introduction of direct flights that reduces the fund’s cost of traveling to the firm, and that these more proximate investments exhibit superior performance. Our findings are robust to the inclusion of a variety of fixed effects and specifications that control for potential confounders such as firm-level shocks, fund-level shocks, and time trends. Collectively, our results indicate that proximity enhances investors' ability to acquire value-relevant information about firms.