Regional Economic Activity and Stock Returns
80 Pages Posted: 2 Nov 2013 Last revised: 16 Feb 2018
Date Written: February 13, 2018
This paper studies the diffusion of regional macroeconomic information into stock prices. I identify all U.S. states that are economically relevant for a company through textual analysis of annual reports and find that economic activity forecasts of company-relevant regions positively predict cross-sectional stock returns. Information arising from all relevant states is more important than that which relates to the headquarter state alone. These forecasts also predict firms' performance and earnings surprises, suggesting that the return predictability stems from future cashflows that are gradually reflected in prices. Finally, regional information takes longer to be incorporated into prices among difficult-to-arbitrage stocks.
Keywords: Regional Economic Activity, Stock Returns, Cashflows, Mispricing, Limits to Arbitrage
JEL Classification: G12, G14, M41, R11
Suggested Citation: Suggested Citation