Regional Economic Activity and Stock Returns

Abstract

This study analyzes the impact of regional economic conditions on 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 regional economic activity. Using this proxy, I find that economic conditions of firm-relevant U.S. regions positively influence 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. Additionally, these results indicate that information arising from all relevant states matters over and above the information content of the mere headquarter state. Furthermore, I show that forecasts on regional economic activity predict stock returns. A zero-cost trading strategy based on this new predictive variable generates a risk-adjusted return of 6.3 (8.3) percent per year using an equal-weighted (value-weighted) portfolio. 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, this study shows that information on regional economic activity is gradually incorporated into stock prices and that the return predictability is stronger among difficult-to-arbitrage firms.

Geographic Proximity and Competition for Scarce Capital: Evidence from U.S. Reits

“…This positive correlation is mainly explained by the cash flow news (i.e., earnings surprise). Our results in Table 4 are consistent with those in Smajlbegovic (2019) and might explain the positive relation between local economic activity and market liquidity documented in Bernile et al (2015). However, due to the possibility of geographic spillovers, these coefficients should be interpreted with caution (since they might be over/under-estimated).…”

“…Bernile et al (2015) document a negative relation between Delta SCI and state Amihud illiquidity and state relative spread, both of which are negatively associated with stock market liquidity. Smajlbegovic (2019) shows that PSEA is positively correlated with future stock returns. This positive correlation is mainly explained by the cash flow news (i.e., earnings surprise).…”

Does Foreign Information Predict the Returns of Multinational Firms Worldwide?

“…Cohen and Lou (2012) document return predictability from the set of single industry firms to more complicated peers such as conglomerates and Cao et al (2015) show that stock returns of strategic alliance partners predict each other. Smajlbegovic (2016) and Addoum et al (2015) find that U.S. state level economic activity measures predict fundamentals and returns of U.S. firms that are economically exposed to these states. Finally, Nguyen (2012) and Huang (2015) investigate the hypothesis that value-relevant foreign information slowly diffuses into the stock prices of U.S. multinational firms.…”

There is no place like home: Information asymmetries, local asset concentration, and portfolio returns

“…The SCI is a state‐level time‐series measure of economic activity and combines four indicators, including nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and real wage and salary disbursements. Next, we follow Smajlbegovic (2019) and calculate the geographically weighted, firm‐specific, local economic activity proxy, LOCAL_ECON_GROWTH (SCI) , using the predicted growth rates of the SCI and the time‐varying percentage of the REIT's portfolio invested in each state. The correlation between this measure and our Bloomberg‐based measure is 0.42.…”