Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power
Chansog (Francis) Kim
The State University of New York at Stony Brook
University of South Florida
Jung Chul Park
August 29, 2011
Journal of Financial Economics (JFE), Forthcoming
We show that political geography has a pervasive effect on the cross-section of stock returns. We collect election results over a 40-year period and use a political alignment index (PAI) of each state’s leading politicians with the ruling (presidential) party to proxy for local firms’ proximity to political power. Firms whose headquarters are located in high PAI states outperform those located in low PAI states, both in terms of raw returns, and on a risk-adjusted basis. Overall, although we cannot rule out indirect political connectedness advantages as an explanation of the PAI effect, our results are consistent with the notion that proximity to political power has stock return implications because it reflects firms’ exposure to policy risk.
Number of Pages in PDF File: 79
Keywords: Political Geography, Political Connections, Policy Risk, Returns, Performance
JEL Classification: G10, G11, H1
Date posted: August 30, 2011 ; Last revised: September 14, 2011
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