Geographic Distribution of Firms and Expected Stock Returns

47 Pages Posted: 30 Aug 2016 Last revised: 18 Nov 2021

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: November 18, 2021

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.

Keywords: geographic distribution, expected stock returns, hedge factor, GDMA portfolio

JEL Classification: G12

Suggested Citation

Dissanayake, Ruchith, Geographic Distribution of Firms and Expected Stock Returns (November 18, 2021). Journal of Economic Dynamics and Control, Vol. 133, No. 104267, 2021, Available at SSRN: https://ssrn.com/abstract=2831046 or http://dx.doi.org/10.2139/ssrn.2831046

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

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