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Regional Economic Activity and Stock Returns

  • Esad Smajlbegovic

Abstract

This paper studies the diffusion of regional macroeconomic information into stock prices. I identify all U.S. states that are economically relevant for a company through textual analysis of annual reports and find that economic activity forecasts of company-relevant regions positively predict cross-sectional stock returns. Information arising from all relevant states is more important than that relating to the headquarter state alone. These forecasts also predict firms’ performance and earnings surprises, suggesting that the return predictability stems from future cash flows that are gradually reflected in prices. Finally, regional information takes longer to be incorporated into prices among difficult-to-arbitrage stocks.

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Copyright

Corresponding author

*Smajlbegovic, smajlbegovic@ese.eur.nl, Erasmus University Rotterdam, Erasmus School of Economics.

Footnotes

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1

This paper is a revised version of the first chapter of my PhD thesis at the University of Mannheim. I am grateful for the invaluable discussions and advice of my dissertation committee, Erik Theissen and Stefan Ruenzi. I thank David Becker, Robert Dittmar, Emily Gallagher (discussant), Joachim Grammig, Stephan Jank, Chao Jiang (discussant), Yigitcan Karabulut, Alok Kumar, Matthijs Lof, Tim Loughran, Paul Malatesta (the editor), Chris Malloy, Jeffrey Pontiff (referee), Tosmai Puenpatom, Otto Randl (discussant), Tobias Regele, Frans de Roon (discussant), Claus Schmitt, Michael Ungeheuer, Patrick Verwijmeren, and Stefan Zeume, seminar participants at the 2014 WFA Meetings, the 2014 EFA Meetings, the 2014 FMA Meetings, and the University of Mannheim, University of Tuebingen, Erasmus University Rotterdam, Aalto University, Frankfurt School of Finance & Management, and Vienna University of Economics and Business (WU) for helpful comments and suggestions. I am responsible for all remaining errors and omissions. Parts of this research project were conducted during a research visit to the University of Michigan, financially supported by the Julius Paul Stiegler Memorial Foundation.

Footnotes

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Regional Economic Activity and Stock Returns

  • Esad Smajlbegovic

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