Neighborhood effect on stock price comovement

• We investigate the neighborhood effect of a firm on its stock price comovement.
• Price comovement is stronger among nearby firms than distant firms.
• Price comovement is inversely related to the distance between firms’ headquarters.
• Being in the same state and/or in the same industry strengthens price comovement.
• Firms of similar share price and size also show stronger price comovement.

We investigate how the geographic distance between firms’ headquarters affects their stock price comovement. Our results show that a firm's stock return has stronger comovement with the returns of nearby firms than with those of distant firms. Being in the same state and/or in the same industry strengthens the return comovement, but does not substitute for the negative effect of geographic distance on price comovement. Firms of similar share price and size also show stronger return comovement, but these factors do not mitigate the negative distance impact. Consistent with investor home bias and neighborhood effect literature, our results suggest that investors’ preference for local stocks and their interactions lead to correlated trading in local stocks and therefore stronger local price comovement.