Robustness Of The Headquarters-City Effect In Stock Returns

Firms headquartered in the same U.S. city experience positive comovement in their stock returns, a finding suggestive of local biases in equity trading activity (Pirinsky and Wang, Journal of Finance, 2006). The authors investigate the robustness of this finding with respect to additional equity pricing factors. They also test for return comovement between sample stocks and non-headquarters city stock portfolios in order to assess whether return comovement with headquarters city portfolios is unusually high. Including additional pricing factors reduces the magnitude of local return comovement, and robustness tests reveal that an implicit null hypothesis of zero local comovement is inappropriate as there is positive return comovement with other city portfolios, on average.