Game in Another Town: Geography of Stock Watchlists and Firm Valuation

Abstract

Beyond a bias toward local stocks, investors prefer companies in some cities over others. This paper exploits the geographic network of investor-followed stocks via stock watchlists to identify intercity investment preferences in China. We measure the city-pair connectivity by its probability of having a common investor whose watchlist has the most concentrated stocks from the city pair. We find that a higher connectivity-weighted aggregate stock demand-to-supply ratio across connected cities is associated with higher stock valuations, higher turnover, better liquidity, and lower costs of equity for firms in the focal city. The effects are robust to the controls for those of geographic proximity and the broad investor base, are more pronounced among small firms, extend to stock return predictability, and imply excess intercity return comovement. Our results suggest that stock watchlist-revealed city connectivity helps identify network factors in asset pricing.

Keywords: Intercity investment preferences, stock watchlist, latent city network, local bias

JEL Classification: G11, G12, G15, G40, G41