GPS-Based Investing

From a new paper demonstrating that stocks prices are skewed along geographic lines:

The Only Game in Town: Stock-Price Consequences of Local Bias
Harrison Hong, Jeffrey D. Kubik, Jeremy C. Stein
Theory suggests that, in the presence of local bias, the price of a stock should be decreasing in the ratio of the aggregate book value of firms in its region to the aggregate risk tolerance of investors in its region. We test this proposition using data on U.S. Census regions and states, and find clear-cut support for it. Most of the variation in the ratio of interest comes from differences across regions in aggregate book value per capita. Regions with low population density–e.g., the Deep South–are home to relatively few firms per capita, which leads to higher stock prices via an “only-game-in-town” effect. This effect is especially pronounced for smaller, less visible firms, where the impact of location on stock prices is roughly 12 percent.


  1. This is an interesting point… But, then, why are stocks for emerging market companies generally valued at a 40-60% discount to broad US comparables? The same postulate would argue that since there are fewer companies in emerging markets that are widely populated then those companies should be worth 10-20% more than a US comp. Is the sovereign risk factor that meaningful that an emerging market stock is valued at 25-30% of a US comp in effective terms?