Political geography and stock returns: The value and risk implications of proximity to political power

Abstract

We posit that noise trader clusters, retail investor base configurations that are homogeneous and informationally segmented, should be associated with greater market inefficiency because they facilitate the spread of common, “local” narratives and sentiment about the stock over fundamentals and market information. Our tests confirm that noise trader clusters have significant stock pricing implications. Stocks with retail investor clusters are associated with stronger peer effects, greater delay in incorporating market information, and more idiosyncratic risk. Consistent with the notion that they are associated with greater arbitrage risk and mispricing, such stocks earn higher risk-adjusted returns and display stronger long-run reversals.