Geography of stock returns: Evidence from an emerging market

Abstract

Does location of corporate headquarters matter for stock returns? Do investors prefer to invest in firms located near them? This study aims to answer these questions by using a large dataset of stock returns for firms listed at the Bombay Stock Exchange during the period between 2003 and 2007. Our results show that stock returns of firms show a strong degree of co-movement with stock returns of other firms located in the same city as them. Interestingly, we also show that this degree of co-movement goes down with firms located in the neighboring cities. We also show that stock returns of firms exhibit the least degree of co-movement with firms that are located farther from the neighboring cities. Furthermore, our results show that this degree of co-movement in stock returns is increasing over the period of time. Our results are consistent with prior literature that considers location as an important determinant of stock returns.