Geography of Firms and Propagation of Local Economic Conditions

Based on the 10-K listings of public firms, we identify economic connections among U.S. states, which lead to excess comovement in returns and liquidity of firms headquartered in connected states. The economic connections create spillover effects whereby the economy of a state affects its connected states thus amplifying the impact of local economic conditions on the U.S. economy. For example, a 1% production increase in California relates to a 6.71% change in annual U.S. GDP growth, relative to average GDP growth. Collectively, the geographic network of public firms facilitates the propagation of local economic conditions across the U.S