Geographic Links and Predictable Returns
55 Pages Posted: 29 Jun 2020 Last revised: 13 Jan 2021
Date Written: June 3, 2020
Using detailed information on establishments owned by U.S. public firms, we construct a novel measure of geographic linkage between firms. We show that the returns of geography-linked firms strongly predict focal firm returns and fundamentals. A long-short strategy based on this effect yields monthly value-weighted alpha of approximately 60 basis points. This effect is distinct from other cross-firm return predictability and is not easily attributable to risk-based explanations. Sell-side analysts similarly underreact, as their forecast revisions of geography-linked firms predict their future revisions of focal firms. Our results are broadly consistent with sluggish price adjustment to dispersed geographic information.
Keywords: Geography, Limited attention, Cross-asset momentum, Market efficiency
JEL Classification: G10, G12, G14, G24
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