Geographic Links and Predictable Returns

Abstract

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