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Regional Economic Activity and Stock Returns

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  • Esad Smajlbegovic
Abstract
This study analyzes the link between regional economic conditions and stock returns. I identify all U.S. states that are economically relevant for a firm through textual analysis of annual reports and construct a novel proxy for future regional economic activity. Using this proxy, I find that forecasts on economic conditions of firm-relevant U.S. regions positively predict stock returns on a monthly basis. This finding is robust to short-term reversal, individual stock momentum, industry momentum, geographic dispersion and a list of standard controls. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 5.75 (5.30) percent per year using an equal-weighted (value-weighted) portfolio. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Further evidence indicates that forecasts of regional activity also predict firms' real operations, suggesting that economic conditions of U.S. regions capture an important cash flow component of stock returns. Finally, I show that the gradual diffusion of regional information is slower among difficult-to-arbitrage firms.

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  • Esad Smajlbegovic, 2015. "Regional Economic Activity and Stock Returns," 2015 Papers psm196, Job Market Papers.
    • Handle: RePEc:jmp:jm2015:psm196
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    2. Christian Finke & Florian Weigert, 2017. "Does Foreign Information Predict the Returns of Multinational Firms Worldwide?," Review of Finance, European Finance Association, vol. 21(6), pages 2199-2248.
    3. Song, Jeongseop & Zhang, Fan, 2024. "Regional market uncertainty and corporate investment," The North American Journal of Economics and Finance, Elsevier, vol. 69(PB).
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    5. Hanauer, Matthias X. & Kalsbach, Tobias, 2023. "Machine learning and the cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 55(C).
    6. David C. Ling & Chongyu Wang & Tingyu Zhou, 2022. "Asset productivity, local information diffusion, and commercial real estate returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(1), pages 89-121, March.
    7. Chen, Zilin & Chu, Liya & Liang, Dawei & Tu, Jun, 2022. "Far away from home: Investors’ underreaction to geographically dispersed information," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    8. Xin Wang & Haofei Zhang, 2023. "The cross‐predictability of industry returns in international financial markets," International Review of Finance, International Review of Finance Ltd., vol. 23(4), pages 859-885, December.
    9. Zifeng Feng & Zhonghua Wu, 2022. "Local Economy, Asset Location and REIT Firm Growth," The Journal of Real Estate Finance and Economics, Springer, vol. 65(1), pages 75-102, July.
    10. Ma, Rui & Marshall, Ben R. & Nguyen, Hung T. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2022. "Climate events and return comovement," Journal of Financial Markets, Elsevier, vol. 61(C).
    11. Wang, Wenlong & Huang, Yuqin & Watson, John & Yang, Bowen, 2023. "The intra-regional spillover effects of bond defaults: Evidence from the Chinese corporate debt market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    12. Zifeng Feng, 2022. "How Does Local Economy Affect Commercial Property Performance?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 361-383, October.
    13. Chongyu Wang & Jeffrey P. Cohen & John L. Glascock, 2019. "Geographic Proximity and Competition for Scarce Capital: Evidence from U.S. REITs," International Real Estate Review, Global Social Science Institute, vol. 22(4), pages 535-570.
    14. Lartey, Theophilus & Danso, Albert & Owusu-Agyei, Samuel, 2020. "CEOs' market sentiment and corporate innovation: The role of financial uncertainty, competition and capital intensity," International Review of Financial Analysis, Elsevier, vol. 72(C).
    15. Rui Du & Junfu Zhang, 2022. "Super bowl participation and the local economy: Evidence from the stock market," Growth and Change, Wiley Blackwell, vol. 53(4), pages 1513-1545, December.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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