Local Risk, Local Factors, and Asset Prices

Abstract

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely, high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which are part of firm assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry‐adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production‐based equilibrium model explains these empirical findings.

Labor‐Technology Substitution: Implications for Asset Pricing

“…My findings also contribute to a growing literature on labor heterogeneity and the cross‐section of stock returns (see Gourio (), Chen, Kacperczyk, and Ortiz‐Molina (), Kuehn, Simutin, and Wang (), and Tuzel and Zhang (), among others). Eisfeldt and Papanikolaou () and Donangelo () derive firm risk by connecting employees' outside options to priced technology frontier shocks and to aggregate economic shocks, respectively.…”

Local predictive ability of analyst recommendations

“…Studies looking at the information sets used by sell‐side analysts find that analyst recommendations contain firm (Malloy, ), market, and industry‐level information (Howe et al., ). Recently, studies have also documented the importance of local fundamentals on asset pricing (e.g., Pirinsky & Wang, ; Korniotis & Kumar, ; Parsons et al., ; Tuzel & Zhang, ). Building on both strands of literature, ours is the first study to use data on stocks’ geographic location at the Metropolitan Statistical Area (MSA) and state levels (hereafter “local") to investigate whether analysts use local information in issuing their recommendations.…”

“…For example, Korniotis and Kumar () find that fluctuations in state‐level economic variables such as unemployment rates and housing collateral predict U.S. state portfolio returns. Tuzel and Zhang () show that the industrial composition of local economies (MSAs) and in particular how cyclical their industries are, has an impact on both firms’ risk and returns. Finally, Parsons, Sabbatucci and Titman () find that regionally‐sorted stock portfolios generate trading profits that are significantly higher than industry‐sorted portfolios.…”

“…As previously discussed, the relevance of geographic proximity on the firm financial decisions and firm‐capital structure is well documented. Moreover, recent research shows that local economic factors are important in predicting stock returns (Korniotis & Kumar, ; Parsons, Sabbatucci & Titman, ; Tuzel & Zhang, ). Studies have also investigated the predictive content of analyst recommendations at the individual firm‐level (Malloy, ), industry‐level (Boni & Womack, ; Kadan et al., ; Howe et al., ) and nation‐level (Howe et al., ; Berkman & Yang, ).…”

Does geographic location matter to stock return predictability?

“…Garcia and Norli () reported that the stocks of geographically focused firms had returns that exceeded the return on stocks of geographically dispersed firms. Korniotis and Kumar (), Gómez, Priestley, and Zapatero (), and Tuzel and Zhang () showed that a firm's geographic location affected stock returns through local risk factors. Our paper complements this literature by exploring the link between a firm's geographic location and stock returns predictability.…”