Geographic Spillover of Dominant Firms' Shocks
81 Pages Posted: 26 Jan 2017 Last revised: 8 Mar 2020
Date Written: March 6, 2020
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 of the top-100 firms 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 portfolio analysis that exploits the slow diffusion of information generates an annual risk-adjusted return of 5.4\%. Overall, the results show how productivity shocks to the few largest firms in the U.S. spillover to other firms and potentially aggregate to affect the national economy.
Keywords: Top-100 firms; productivity shocks; systematic information; geographic spillover; information diffusion
JEL Classification: G02; G14; G24
Suggested Citation: Suggested Citation