An Empirical Research Of Co-movement Of Location: Evidence From China A-share Stock Market

In this paper we study the co-movement of location in Chinese A-share stock market. Co-movement of stock returns of firms headquartered in the same geographic area is a heated topic. So far, the study in foreign countries on co-movement of stock returns mainly focused on market co-movement, industry co-movement and location co-movement. However, the study in Chinese stock market mostly confined to the overall market level and industry level. Pirinsky and Wang studied the relationship between the geographical location of firms headquarter and their stock return. They found that there was a strong co-movement of stock returns of firms headquartered in American stock market. But compared to American stock market, Chinese stock market is still an immature emerging markets. This paper studies the a-share market in Shanghai stock exchange and Shenzhen stock exchange all the empirical study of listed companies, confirmed that the co-movement of stock returns of firms headquartered in Chinese stock market is also very strong.Firstly, this paper uses the monthly stock return data of a-share companies in China in 2000-2014. We build the return model including region factors, industry factors and market impact factor by the weighted average of the stock return in every province. We estimate the βiLOC,βiIND and βiIND by establishing regression equation, then we calculate all stock on cross section level time impact factor coefficient of the mean regression results, and we do the t-test to find out whether the mean is 0. Through the empirical study we find that the co-movement of stock returns of firms headquartered in Chinese stock market is also very strong, in ruled out the industry factors and market factors, the influence of regional correlation is significant. Therefore, investors can reduce risk by holding shares of different provinces.Secondly, this paper discusses the factors which influence the co-movement of stock return in two different dimensions:the corporation characteristics level and regional basic characteristics. For corporation characteristics, we find that some specific company level characteristics can determine the strength of the co-movement of stock return. Empirical study results show that the smaller the company is, the stronger the co-movement of stock return is. Because compared to larger companies, small companies is more familiar with the local investors and the local exposure is higher, so more local investors tend to buy the stock of small companies, so as to make the co-movement of stock return more significant for smaller companies. This paper also finds that the lower the ROA is, the stronger the company’s co-movement of stock return is. This is because that the higher the company’s ROA is, the company shares in the attraction of the non-local investors is higher, the stronger the profitability of the company’s financial more transparent is, the company are more able to attract foreign investors, the company profit ability, the worse the ability of local economy and local investors to invest, the greater the influence of regional correlation.For regional basic characteristics, if a province has a large number of a-share companies, the companies whose headquarter located in this province will have a weaker co-movement of stock return with other companies. The personal income has no influence on the co-movement of stock return.At last, this paper puts forward the corresponding policy recommendations respectively from the perspective of investors to construct portfolio management, asset pricing and the perspective of policy and regulation.