Agglomeration Economies and Local Comovement of Stock Returns

Fu, Shihe and Shan, Liwei (2011): Agglomeration Economies and Local Comovement of Stock Returns.

Abstract

Existing studies in finance have documented the comovement of stock returns of companies headquartered in the same location. The interpretation is that local investors have a “local bias” due to an information advantage on local companies. This paper argues that localized agglomeration economies affect the fundamentals of local companies, resulting in the local comovement of stock returns. Using the data for China A-share listed companies from 1997-2007, we confirm the local comovement of stock returns of companies headquartered in the same city; moreover, the stock returns of a company headquartered in a city with stronger agglomeration economies are also correlated more highly with stock returns of other companies headquartered in the same city. The local comovement of earnings among companies headquartered in the same city is also found, and the local comovement of stock returns is correlated with the local comovement of earnings. We conclude that correlated local fundamentals due to localized agglomeration economies can explain the local comovement of stock returns.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stock returns; Local bias; Agglomeration economies
• Subjects: G - Financial Economics > G1 - General Financial Markets; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location

References

Almazan, A., Motta, A., Titman, S., Uysal, V., 2007. Financial structure, liquidity, and firm locations, NBER Working Paper 13660.

Anderson, C., Beracha, E., 2008. Robustness of the headquarters-city effect on stock returns, Journal of Financial Research 31, 271-300.

Barker, D., Loughran, T., 2009. The geography of S&P 500 stock returns, Journal of Behavioral Finance 8, 177-190.

Brown, J., Ivković, Z., Smith, P., Weisbenner, S., 2004. The geography of stock market participation: The influence of communities and local firms, NBER Working Paper 10235.

Brown, J., Ivković, Z., Smith, P., Weisbenner, S., 2008. Neighbors matter: Causal community effects and stock market participation, Journal of Finance 63, 1509-1531.

Carhart, M., 1997. On persistence in mutual fund performance, Journal of Finance 52, 57-82.

Coval, J., Moskowitz, T., 1999. Home bias at home: Local equity preference in domestic portfolios, Journal of Finance 54, 2045-2073.

Coval, J., Moskowitz, T., 2001. The geography of investment: Informed trading and asset prices, Journal of Political Economy 109, 811-841.

Davis, J., Henderson, V., 2008. The agglomeration of headquarters, Regional Science and Urban Economics 38, 445-460.

Duranton, G., Puga, D., 2004. Micro-foundations of urban agglomeration economies, in Henderson, V., Thisse, J.F. (eds.), Handbook of Regional and Urban Economics IV, Amsterdam: North Holland, pp. 2063-2118.

Eckel, S., Lӧffler, G., Maurer, A., Schmidt, V., 2011. Measuring the effects of geographical distance on stock market correlation, Journal of Empirical Finance 18, 237-247.

Fama, E., French, K., 1993. Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3-56.

Fama, E., MacBeth, J., 1973. Risk, return, and equilibrium: Empirical tests, Journal of Political Economy 81, 607-636.

Feng, L., Seasholes, M., 2004. Correlated trading and location, Journal of Finance 59, 2117-2144.

Fu, S., 2007. Smart café cities: Testing human capital externalities in the Boston metropolitan area, Journal of Urban Economics 61, 86-111.

Fu, S., Hong, J., 2011. Testing urbanization economies in manufacturing industry: Urban diversity or urban size? Journal of Regional Science, forthcoming.

Ghosh, C., Rodriguez, M., Sirmans, C., 1995. Gains from corporate headquarters relocations: Evidence from the stock market, Journal of Urban Economics 38, 291-311.

Glaeser, E., Kallal, H., Scheinkman, J., Shleifer, A., 1992. Growth in cities, Journal of Political Economy 100, 1126-1152.

Goetzmann, W., Massa, M., Simonov, A., 2004, Portfolio diversification and city agglomeration, NBER Working Paper 10343.

Grinblatt, M., Keloharju, M., 2001. How distance, language, and culture influence stockholdings and trades, Journal of Finance 56, 1053-1073.

Helsley, R., and Strange, W., 1991. Agglomeration economies and urban capital markets, Journal of Urban Economics 29, 96-112.

Henderson, V., 2003. Marshall’s scale economies, Journal of Urban Economics 53, 1-28.

Hong, H., Kubik, J., Stein, J., 2004. Social interaction and stock-market participation, Journal of Finance 59, 137-163.

Hong, H., Kubik, J., Stein, J., 2005. Thy neighbor’s portfolio: Word-of-mouth effects in the holdings and trades of money managers, Journal of Finance 60, 2801-2824.

Hong, H., Kubik, J., Stein, J., 2008. The only game in town: Stock-price consequences of local bias, Journal of Financial Economics 90, 20-37.

Ivković, Z., Weisbenner, S., 2004. Local does as local is: Information content of the geography of individual investors’ common stock investments, Journal of Finance 60, 267– 306.

Jennen, M., Verwijmeren, P., 2010. Does agglomeration affect financial performance? Urban Studies 47, 2683-2703.

Korniotis, G., Kumar, A., 2008. Long Georgia, short Colorado? The geography of return predictability, McCombs School of Business Working Paper, University of Texas at Austin.

Mavruk, T., 2008. Local bias of investors in Sweden, International Research Journal of Finance and Economics 22, 7-25.

Pirinsky, C., Wang, Q., 2006. Does corporate headquarters location matter for stock returns? Journal of Finance 61, 1991-2015.

Rosenthal, S., Strange, W., 2004. Evidence on the nature and sources of agglomeration economies, in Henderson, V., Thisse, J.F. (eds.), Handbook of Regional and Urban Economics IV, Amsterdam: North Holland, pp. 2119-2171.

Rosenthal, S., Strange, W., 2008. The attenuation of human capital spillovers, Journal of Urban Economics 64, 373-389.

Rudorfer, M., 2007. The impact of headquarters location on stock returns, Diploma Thesis. European Business School - International University Schloss Reichartshausen Oestrich-Winkel.

Wongchoti, U., Wu, F., 2008. Provincial co-movement in Chinese stock returns, Applied Financial Economics Letters 4, 171-176.

Zhu, N., 2008. The local bias of individual investors, Yale School of Management Working Paper.