Mobile Communication and Local Information Flow: Evidence from Distracted Driving Laws

• DOI: http://doi.org/10.1111/1475-679X.12077
• Date: 01 May 2015
• Published date: 01 May 2015
• Author: HAN STICE,ROGER M. WHITE,NERISSA C. BROWN

DOI: 10.1111/1475-679X.12077

Journal of Accounting Research

Vol. 53 No. 2 May 2015

Printed in U.S.A.

Mobile Communication and Local

Information Flow: Evidence from

Distracted Driving Laws

NERISSA C. BROWN,

∗HAN STICE,

†AND ROGER M. WHITE

‡

Received 6 January 2014; accepted 15 February 2015

ABSTRACT

We examine the influence of mobile communication on local information

flow and local investor activity using the enforcement of statewide distracted

driving restrictions, which are exogenous events that constrain mobile com-

munication while driving. By restricting mobile communication across a po-

tentially sizable set of local individuals, these restrictions could inhibit local

∗Alfred Lerner College of Business & Economics, University of Delaware; †Warrington

College of Business Administration, University of Florida; ‡Goizueta Business School, Emory

University.

Accepted by Christian Leuz. We are especially grateful to our editor and an anony-

mous referee for insightful comments and suggestions. We appreciate comments from

William Ciconte, Ilia Dichev, Michael Drake, Brooke Elliott, Rich Frankel, John Galle-

more, Paul Laux, Lisa Laviers, Shivaram Rajgopal, Giulia Redigolo, Laura Swenson,

Christina Synn, Jacob Thornock, Jenny Tucker, Devin Williams, and workshop partici-

pants at Emory University, Georgia State University, University of Delaware, University

of Florida, University of Pennsylvania, the 2014 Journal of Accounting Research Confer-

ence, 2014 AAA FARS Mid-year Meeting, 2014 AAA Southeast Region Meeting, 2013

Southeastern States Accounting Research Conference, and 2013 Brigham Young Uni-

versity Annual Symposium. We thank Stuart Smith for excellent research assistance

and the following doctoral seminar students for their suggestions: Heba Abdel-Rahim,

Stuart Smith, Tu Xu, Di Yang, and Zhen Zhang. This research was supported in part through

the use of Information Technologies (IT) resources at the University of Delaware, specifically

the high-performance computing resources. We thank Anita Schwartz and the Institute of Fi-

nancial Services Analytics for assistance in using these resources. An online appendix to this

paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-

research/online-supplements.

275

Copyright C, University of Chicago on behalf of the Accounting Research Center,2015

276 N.C.BROWN,H.STICE,AND R.M.WHITE

information flow and, in turn, the market activity of stocks headquartered

in enforcement states. We first document a decline in Google search activity

for local stocks when restrictions take effect, suggesting that constraints on

mobile communication significantly affect individuals’ information search

activity. We further find significant declines in local trading volume when

restrictions are enforced. This drop in liquidity is (1) attenuated when laws

provide substitutive means of mobile communication and (2) magnified

when locals have long car commutes and when their daily commutes over-

lap with regular exchange hours. Moreover, trading volume suffers the most

for local stocks with lower institutional ownership, less analyst coverage, and

more intangible information. Additional analyses show lower intraday vol-

ume during local commute times when mobile connectivity is constrained.

Together, our results suggest that local information and local investors matter

in stock markets and that mobile communication is an important mechanism

through which these elements operate to affect liquidity and price discovery.

JEL codes: D83; G12; G14; M41

Keywords: mobile communication; local bias; liquidity

1. Introduction

The last two decades have seen major advances in the dissemination of

stock market information and the venues through which market partici-

pants receive and process stock information. One important innovation is

the use of mobile or wireless communication devices (e.g., cellular phones,

smartphones, wireless PDAs, tablets, and other handheld devices) by mar-

ket participants to gather, disseminate, and process valuable information

about firms.1Many argue that such advances play a vital role in promot-

ing transparency, liquidity, and efficiency in capital markets. In particular,

academics, regulators, and practitioners posit that mobile communication

improves the speed and flow of information among market participants,

and provides real-time, low-cost information to a broad base of investors

(SEC [1997], D’Avolio, Gildor, and Shleifer [2001]). Further, it is widely

held that mobile devices promote greater investor activity by providing in-

dividuals with convenient, round-the-clock, and inexpensive access to stock

information (Moore [2013], Patel [2014]).

Despite these views, little research has assessed the role of mobile com-

munication technology in stock markets. We fill this gap by investigating

the influence of mobile communication on local information flow and lo-

cal investor activity, and how this mechanism operates to affect the market

1Several brokerage houses report extensive use of mobile devices by investors. For instance,

Morgan Stanley reports that 1 in 10 of their analyst reports are accessed wirelessly using the

firm’s mobile application (Hurewitz [2013]). E-Trade reports that 30% of investors with an

online brokerage account of at least $10,000 use a mobile device to manage their portfolio

(Fottrell [2014]).

MOBILE COMMUNICATION AND LOCAL INFORMATION FLOW 277

activity of local stocks.2Our study answers the call for empirical evidence

on the economic impact of mobile communication on market quality and

how such technologies influence the market activity of individual investors

(Hurewitz [2013]). We pay particular attention to local investors as prior

research documents that individual investors have a strong preference for

holding local stocks and that this preference may reflect local informational

advantages (see, e.g., Ivkovi´

c and Weisbenner [2005]). Further, prior work

suggests that local investors contribute substantially to liquidity and price

discovery for local stocks (Loughran and Schultz [2004], Shive [2012],

Peress [2014]). Thus, we shed further light on the importance of local

information and local investors in stock markets, and whether mobile

communication serves as an important mechanism through which these

elements operate to influence stock activity.

We exploit the implementation of state-level distracted driving laws as a

unique identification strategy to evaluate the joint impact of local investors

and mobile-based information flow on stock activity. Distracted driving laws

have been enacted at an accelerating pace across the United States in an ef-

fort to address the increased use of mobile devices while driving, especially

as more Americans opt to commute alone by car (Ibrahim et al. [2011]).3,4

The enforcement of these laws provides a novel set of exogenous (nonin-

formation) events that restrict mobile communication and wireless access

to stock information across an economically large set of local individuals.

We use these events to examine whether constraints on mobile communi-

cation induced by statewide distracted driving laws significantly affect local

stock activity.

The basic premise of our study is that distracted driving restrictions cre-

ate exogenous informational frictions for local stocks. Specifically, we ar-

gue that constraints on mobile communication while driving could impede

or delay the collection and diffusion of local stock information across lo-

cal individuals. Anecdotal evidence suggests that some individuals use car

2Consistent with prior research, we define a stock’s location using the location of its head-

quarters. Thus, we refer to “local stocks” as those headquartered in the states implementing

restrictions on mobile use while driving.

3Surveys report that individuals engage in several activities while driving, such as using mo-

bile devices and navigation systems, listening to radio broadcasts or recorded material, eating

and drinking, personal grooming, and talking to passengers (Royal [2003]). Among these

activities, mobile device use is quite common with about 40% of drivers reporting that they

make or answer mobile phone calls at least sometimes, while 14% (10%) read (send) text

messages or emails (Schroeder,Meyers, and Kostyniuk [2013]). These usage rates are dramat-

ically higher for distraction-prone drivers (i.e., those individuals who consistently engage in

multiple activities while driving)—73% make or answer mobile phone calls at least sometimes

and 40% (29%) read (send) email or text messages.

4The rate of solo car commutes has risen steadily over the last three decades (Shah [2013]).

According to 2012 (1980) U.S. census data, 76.3% (64.4%) of American workers 16 years and

older drove to work alone, with 9.7% (19.7%) carpooling and only 5% (6.4%) using public

transportation.