Geography of Firms and Propagation of Local Economic Shocks

• Main Authors: BERNILE, Gennaro, Korniotis, George, Kumar, Alok
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Local business cycles; geographical networks; economic links; publicly-traded firms; propagation of recessions; Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3778; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4777/viewcontent/EconLinks12.pdf
• Institution: Singapore Management University

This study shows that the geographical distribution of publicly-traded firms generates an economic network that links the economic environments of all U.S. states. Using a novel measure of economic linkages among publicly-traded firms, we build a state-level network of economic connections and show that local economic shocks propagate through this geographical network. Specifically, for each state, we identify U.S. states that are economically relevant for firms headquartered in that state and show that economic conditions in economically relevant states predict the economic environment in the headquarter state. These results do not merely reflect the impact of omitted common national shocks. Using monetary losses from state-level natural disasters as an instrument, we show that state- level economic shocks propagate through the economic network generated by public companies. Overall, this evidence has important implications for the evaluation of targeted government policies such as the recent hurricane relief or bailout programs.