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Do agglomeration economies affect the local comovement of stock returns? Evidence from China

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  • Michael Firth

    (Lingnan University, Hong Kong)

  • Shihe Fu

    (Southwestern University of Finance and Economics, China)

  • Liwei Shan

    (Southwestern University of Finance and Economics, China)

Abstract

Prior studies in finance have examined the comovement of stock returns of firms headquartered in the same location. One interpretation of the results is that local investors have a ‘local bias’ due to an information advantage on local firms. We propose that localised agglomeration economies affect the fundamentals of local firms, resulting in the local comovement of stock returns. Using data for China A-share listed firms from 1997 to 2007, we find evidence of the comovement of stock returns of Chinese firms headquartered in the same city. We find inconsistent evidence for the local bias theory. The comovement of the stock returns of firms headquartered in the same city is stronger when the agglomeration economies in the city are stronger, suggesting that localised agglomeration economies provide an alternative explanation of the comovement of stock returns.

Suggested Citation

  • Michael Firth & Shihe Fu & Liwei Shan, 2017. "Do agglomeration economies affect the local comovement of stock returns? Evidence from China," Urban Studies, Urban Studies Journal Limited, vol. 54(5), pages 1142-1161, April.
  • Handle: RePEc:sae:urbstu:v:54:y:2017:i:5:p:1142-1161
    DOI: 10.1177/0042098016633101
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