Abstract
Investors have preferences for local companies, as well as companies in connected cities. We develop a novel approach to exploit the geographic connections of investor watched stocks to identify latent city-to-city connections that influence geographic investment preferences in China. We find cities that are more connected to the others with greater investor stock demand relative to local supply are associated with higher stock valuations, greater share turnover, and better liquidity of their local firms. The city-connection-induced geographic gaps in valuation, turnover, and liquidity are robust with controls for local stock demand and that from geographically proximate cities, are stronger for small firms, and extend to stock returns. Furthermore, local and connected city stocks share excess return comovement beyond common risk factors. The findings suggest that watchlist-revealed city connectivity helps to discover an important network factor in asset pricing.
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