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Geographic distribution of firms and expected stock returns

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  • Dissanayake, Ruchith

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.

Suggested Citation

  • Dissanayake, Ruchith, 2021. "Geographic distribution of firms and expected stock returns," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:dyncon:v:133:y:2021:i:c:s0165188921002025
    DOI: 10.1016/j.jedc.2021.104267
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    More about this item

    Keywords

    Geographic distribution; Expected stock returns; Hedge factor; GDMA portfolio;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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