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
- Classify a number of regulation changes that were made during the time sample, and conduct difference in differences tests.