Stock Market Valuations across U.S. States

Bekaert, Geert, Campbell R. Harvey, Christian T. Lundblad, and Stephan Siegel, “Stock Market Valuations across U.S. States” American Finance Association, 75th Annual Meeting, Boston (2015).

Purpose:  To show that state-specific regulatory environment affects valuation, and to estimate the marginal impact of regulation.


  • After controlling for leverage and earnings growth volatility, PE ratios vary across states within the same industry (segmentation).
  • State-specific financial deregulation decrease segmentation.
  • Increased labor laws increase segmentation.
  • Higher state-specific unemployment is linked with higher segmentation.
  • Higher population density is linked with lower segmentation.
  • Segmentation has been decreasing since the mid-1970s.
  • Distance between a given state’s capital and New York’s capital is a statistically significant, but economically small, determinant of segmentation


  • Calculate the absolute difference in P/E ratios between an industry in a given state and the same industry in New York (the financial center of the U.S.)
    • price data comes from CRSP, with earnings data from Compustat
    • noise biases the measure upwards, so the measure is smaller for years or states with smaller firms
  • A state’s level of segmentation is given by the value-weighted sum of the measure for all industries in the state.
  • Regress the segmentation measure on variables
    • difference in leverage between industries in the given state and the same industries in New York
    • difference in earnings growth
    • difference in return volatility
    • number of firms in the state
    • time
  • Classify a number of regulation changes that were made during the time sample, and conduct difference in differences tests.