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Regional Economic Activity and Stock Returns

Esad Smajlbegovic ()

Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: This study analyzes the impact of regional economic conditions on stock returns. I identify all U.S. states that are economically relevant for a firm through textual analysis of annual reports and construct a novel proxy for regional economic activity. Using this proxy, I find that economic conditions of firm-relevant U.S. regions positively influence stock returns on a monthly basis. This finding is robust to short-term reversal, individual stock momentum, industry momentum, geographic dispersion and a list of standard controls. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Furthermore, I show that forecasts on regional economic activity predict stock returns. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 6.3 (8.3) percent per year using an equal-weighted (value-weighted) portfolio. Evidence indicates that forecasts of regional activity also predict firms' real operations, suggesting that economic conditions of U.S. regions capture an important cash flow component of stock returns. Finally, this study shows that information on regional economic activity is gradually incorporated into stock prices and that the return predictability is stronger among difficult-to-arbitrage firms.

JEL-codes: G12 G14 R11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-sbm and nep-ure
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112854

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