Too close for comfort? Geographic propinquity to political power and stock returns

Abstract

We show that firm headquarters’ geographic proximity to political power centers (state capitals) is associated with higher abnormal returns. Consistent with the notion that this effect is rooted in social network links, we find it is more pronounced in communities with high levels of sociability and political values’ homophily, and that it dissipates when firms move their headquarters to another state. Finally, in line with the view that investors perceive such networks to be associated with political risk, we find that this effect is particularly strong when there are substantial levels of corruption, dependency on government spending, and politicians’ turnover.