The impact of headquarters location on stock returns

Table of Contents

1 Introduction

1.1 Motivation and Problem Definition

1.2 Course of the Analysis

2 The Fundamentals of International Capital Markets

2.1 The Concept of Portfolio Theory

2.1.1 Portfolio Optimization

2.1.2 International Diversification

2.2 Integration versus Segmentation of Capital Markets

2.3 The Concept of Market Efficiency

2.3.1 Operational and Informational Market Efficiency

2.3.2 Market Efficiency and Behavioral Finance

3 Home Bias and Local Bias in Equities

3.1 Definition of Home Bias and Local Bias

3.2 Different Explanations to the Bias Puzzle

3.2.1 National Barriers to International Investments

3.2.2 Hedging of Country-specific Risks

3.2.3 Information Advantages of Local Investors

3.2.4 Familiarity

3.2.5 Social Interaction of Investors and Trading Patterns

3.3 Home Bias from a German Perspective

3.3.1 Benefits from International Diversification for German Investors

3.3.2 Actual Portfolio Holdings of German Investors

4 Geographic Component of Asset Pricing

4.1 Location of Corporate Headquarters

4.2 Agglomeration of Headquarters

4.3 Geographic Implications on Stock Returns

4.3.1 Fundamentals and Geographic Segmentation

4.3.2 Hypothesis of Local Asset Pricing

5 Description of the Data Set

5.1 Data Selection

5.2 Descriptive Statistics

6 Empirical Analysis

6.1 Comovement of Local Stocks

6.1.1 Methodology – Time-series Regressions

6.1.2 Results

6.2 Robustness Test

6.2.1 Resampling Method

6.2.2 Local Comovement versus Non-local Comovement

6.3 Local Comovement Attributable to Fundamentals

6.3.1 Methodology – Time-series Regressions

6.3.2 Results

6.4 Firm-specific and Regional Determinants

6.4.1 Methodology – Cross-sectional and Panel Regressions

6.4.2 Results

6.5 Limitations of the Model

7 Summary and Conclusion

Objectives and Research Focus

This thesis explores the relationship between the geographical location of corporate headquarters and stock returns. It investigates whether investors' local bias, characterized by the preference for geographically proximate assets, leads to a significant geographical component in asset pricing that cannot be solely attributed to market fundamentals.

• The influence of corporate headquarters' location on stock performance.
• Empirical analysis of local comovement of stock returns in Germany.
• Evaluation of whether local comovement is driven by rational fundamentals or geographical segmentation.
• Examination of firm-specific and regional determinants of local comovement.

Excerpt from the Book

Summary of Chapters

1 Introduction: This chapter defines the research problem regarding the impact of corporate headquarters' location on stock returns and outlines the structure of the analysis.

2 The Fundamentals of International Capital Markets: This section introduces the theoretical framework of portfolio optimization, market efficiency, and international diversification.

3 Home Bias and Local Bias in Equities: This chapter provides an extensive overview of home and local bias, presenting various academic explanation attempts from institutional to behavioral perspectives.

4 Geographic Component of Asset Pricing: This section analyzes the role of headquarters' location, agglomeration effects, and develops hypotheses regarding the geographical impact on stock returns.

5 Description of the Data Set: This chapter describes the data selection process for German corporations and provides descriptive statistics for the sample.

6 Empirical Analysis: This core chapter presents the methodology and results of time-series, cross-sectional, and panel regressions to test the formulated hypotheses and assess the robustness of the findings.

7 Summary and Conclusion: This final chapter synthesizes the main empirical findings and discusses the implications for investors, corporations, and future research.

Keywords

Home Bias, Local Bias, Asset Pricing, Corporate Headquarters, Portfolio Theory, Market Efficiency, Behavioral Finance, Comovement, Geographic Segmentation, International Diversification, Firm Determinants, Regional Determinants, Germany, CDAX, Investment Sentiment

Frequently Asked Questions

What is the core subject of this thesis?

The thesis examines the impact of the geographical location of corporate headquarters on stock returns, specifically focusing on how the "local bias" of investors influences asset pricing patterns.

What are the primary thematic fields covered?

The research combines international portfolio theory, market efficiency, behavioral finance, and economic geography to explain why investors prioritize local assets and how this affects stock market comovements.

What is the primary research question?

The analysis seeks to answer whether the location of corporate headquarters has a quantifiable impact on stock returns that can be attributed to the local bias of investors.

Which scientific methodology is applied?

The author uses empirical time-series, cross-sectional, and panel regressions to analyze the monthly stock returns of German corporations included in the CDAX between 1986 and 2005.

What topics are discussed in the main part?

The main part covers theoretical foundations of international capital markets, explanations for the home/local bias puzzle, the geographical implications of headquarters' locations, and a detailed empirical analysis of comovement and its determinants.

Which keywords best characterize this work?

Key terms include Home Bias, Local Bias, Asset Pricing, Geographic Comovement, and Corporate Headquarters.

Does the author find that geography affects stock returns?

Yes, the empirical results confirm a strong local comovement of stock returns, suggesting that geographical proximity is a significant factor in investor behavior and price formation.

Is the local comovement driven by economic fundamentals?

No, the study concludes that the observed local comovement is not sufficiently explained by macroeconomic fundamentals, supporting the view that geographical segmentation and correlated investor behavior play a larger role.