Geographic distribution of firms and expected stock returns

I examine the effects of geographic distribution of firms on the expected stock returns. Information spillovers and coordinated actions by interacting managers increase the cyclicality of wages in agglomerated industries compared to dispersed industries. Consequently, geographic agglomeration provid...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2021-12, Vol.133, p.104267, Article 104267
Main Author: Dissanayake, Ruchith
Format: Article
Language:English
Subjects:
Expected stock returns
GDMA portfolio
Geographic distribution
Hedge factor
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Summary:I examine the effects of geographic distribution of firms on the expected stock returns. Information spillovers and coordinated actions by interacting managers increase the cyclicality of wages in agglomerated industries compared to dispersed industries. Consequently, geographic agglomeration provides firms a “natural hedge” against aggregate shocks. In contrast, geographically dispersed firms have higher exposure to aggregate shocks. A portfolio that goes long on geographically dispersed industries minus agglomerated industries – the GDMA portfolio – captures aggregate shocks. Stocks that co-vary closely with the GDMA portfolio returns earn higher expected returns. In the time-series, the premium is more pronounced during recessions when investors shrink from risk. In the cross-section, the premium is more pronounced among low profitable firms that are more vulnerable to adverse shocks.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2021.104267