Abstract
Using detailed information on establishments owned by U.S. public firms, we construct a novel measure of geographic linkage between firms. We show that the returns of geography-linked firms have strong predictive power for focal firm returns and fundamentals. A long-short strategy based on this effect yields monthly value-weighted alpha of approximately 60 basis points. This effect is distinct from other cross-firm return predictability and is not easily attributable to risk-based explanations. It is more pronounced for focal firms that receive lower investor attention, are more costly to arbitrage, and during high sentiment periods. Sell-side analysts similarly underreact, as their forecast revisions of geography-linked firms predict their future revisions of focal firms. Further tests suggest that the lead-lag relation we document results from innovation spillover among geographic peers in addition to their common exposure to the local economy.
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