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Geographic distribution of firms and expected stock returns

Ruchith Dissanayake

Journal of Economic Dynamics and Control, 2021, vol. 133, issue C

Abstract: 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.

Keywords: Geographic distribution; Expected stock returns; Hedge factor; GDMA portfolio (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:133:y:2021:i:c:s0165188921002025

DOI: 10.1016/j.jedc.2021.104267

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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