Too close for comfort? Geographic propinquity to political power and stock returns |
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Institution: | 1. University of Zurich, Department of Banking and Finance, Plattenstrasse 14, 8032 Zurich, Switzerland;2. ETH Zurich, Department of Mathematics, Rämistrasse 101, 8092 Zurich, Switzerland, Zurich, Switzerland;3. Swiss Finance Institute, Zurich, Switzerland;4. Queen Mary University of London and CEPR, Mile End Road, London E1 4NS, UK;5. Bucharest University of Economic Studies, Department of Money and Banking, Bucharest, Romania |
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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. |
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Keywords: | Social network Homophily Political connections Policy risk Returns Performance |
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