Does Corporate Headquarters Location Matter for Stock Returns?

Abstract

We document strong comovement in the stock returns of firms headquartered in the same geographic area. Moreover, stocks of companies that change their headquarters location experience a decrease in their comovement with stocks from the old location and an increase in their comovement with stocks from the new location. The local comovement of stock returns is not explained by economic fundamentals and is stronger for smaller firms with more individual investors and in regions with less financially sophisticated residents. We argue that price formation in equity markets has a significant geographic component linked to the trading patterns of local residents. Copyright 2006 by The American Finance Association.

Shareholder Coordination, Information Diffusion and Stock Returns

“…Analyst coverage is negatively related to both shareholder coordination measures. Pirinsky and Wang (2006) document that stock returns exhibit strong local comovement and attribute the phenomenon to the trading pattern of local residents whose information sets are effectively segmented from that of outside investors. We also find that the fractional holdings' weighted Table 1 Summary statistics This table reports the descriptive statistics of main variables in the sample during January 1994-December 2010.…”

“…To test this hypothesis, following Pirinsky and Wang (2006), we construct local stock return indices for each MSA by equally weighting the returns of all stocks within each MSA. To test this hypothesis, following Pirinsky and Wang (2006), we construct local stock return indices for each MSA by equally weighting the returns of all stocks within each MSA.…”

“…An alternative explanation provided byPirinsky and Wang (2006) is that local comovement is rooted on local investors' preferences toward local stocks stemming from familiarity and/or loyalty.…”

Does Cluster Membership Enhance Financial Performance?

“…Pirinsky and Wang (2006) [29] examine the stock returns of over 5000 firms that are headquartered in the same geographic areas during 1988 and examine the monthly stock returns for these firms through the year 2002. They find a strong co-movement of returns, an association that decreases following corporate relocations.…”

“…Adopting the procedure in Pirinsky and Wang (2006) [29], headquarters locations are classified based upon Metropolitan Statistical Areas (MSAs). The Census Bureau (US Census Bureau, 2011) [34] describes MSAs as geographic entities used to collect, tabulate, and publish Federal statistics.…”