Geographic Spillover of Dominant Firms' Shocks
63 Pages Posted: 26 Jan 2017 Last revised: 1 May 2019
Date Written: April 29, 2019
This paper shows that productivity shocks to the 100 largest U.S. firms (by revenue) contain systematic information. Specifically, shocks to the top-100 firms predict future shocks to geographically close firms. Intra-sector trade links are an important economic channel for spillover effects. However, these spillovers are not restricted to firms' trade links only. Knowledge externalities and state income tax payments are other economic channels through which shocks propagate. Market participants do not fully incorporate the information contained in shocks to the top-100 firms. Consequently, a trading strategy that exploits the slow diffusion of information generates an annual risk-adjusted return of 5.4%.
Keywords: Top 100 firms; Idiosyncratic shocks; systematic information; geographic spillover; information diffusion
JEL Classification: G02, G14, G24
Suggested Citation: Suggested Citation