Do agglomeration economies affect the local comovement of stock returns? Evidence from China

Michael Firth, Shihe Fu () and Liwei Shan
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Michael Firth: Lingnan University, Hong Kong

Urban Studies, 2017, vol. 54, issue 5, 1142-1161

Abstract: Prior studies in finance have examined the comovement of stock returns of firms headquartered in the same location. One interpretation of the results is that local investors have a ‘local bias’ due to an information advantage on local firms. We propose that localised agglomeration economies affect the fundamentals of local firms, resulting in the local comovement of stock returns. Using data for China A-share listed firms from 1997 to 2007, we find evidence of the comovement of stock returns of Chinese firms headquartered in the same city. We find inconsistent evidence for the local bias theory. The comovement of the stock returns of firms headquartered in the same city is stronger when the agglomeration economies in the city are stronger, suggesting that localised agglomeration economies provide an alternative explanation of the comovement of stock returns.

Keywords: agglomeration economies; firm value; headquarters; local bias; stock returns (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:urbstu:v:54:y:2017:i:5:p:1142-1161

DOI: 10.1177/0042098016633101

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