We test the hypothesis that value-relevant information diffuses faster (slower) into tock prices of firms located in areas with (without) geographic ties to powerful oliticians. Using two alternative measures of such ties as proxies for a location’s political vibrancy, we show that there is more value-relevant information generated in politically vibrant areas, and that equity markets in these areas tend to be somewhat segmented from the rest of the country. Accordingly, stock returns of firms from politically vibrant areas predict those in non-vibrant areas. Consistent with the notion that an area’s political vibrancy can affect local investor ability to process complicated information in a timely manner, this return predictability pattern is more pronounced among large firms and during periods characterized by higher uncertainty traced to random events constituting exogenous political shocks.
JEL classification: G11, G12, G18, H10
Keywords: Geographical ties; political connections; returns; performance.
