Firms located in dense urban areas present higher productivity due to the flow of ideas and innovation in these areas. Through this productivity channel, the urban density characteristics of the areas where firms are located affect the stock returns. We use high-resolution satellite images from Google Earth to develop an exogenous measure of potential density increase (PDI) for the 95 most populated metropolitan statistical areas (MSAs) in the US. This measure represents the proportion of area in the total area within a 1 hour drive from the center of the MSA that could rapidly increase its density. We find that firms located in areas with a high potential density increase present lower stock returns: on average a 10% higher PDI of an MSA results in a 0.29% lower excess stock return of firms located in this MSA.

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Keywords Productivity, Stock returns, Urban density, Agglomeration
Conference 2019 AREUEA-ASSA Conference, 12th World Conference of the Spatial Econometrics Association (SEA), 21st Uddevalla Symposium 2018, European Regional Science Association, 58th ERSA Congress, 2018 PhD Conference on Real Estate and Housing, Conference on Frontiers of Factor Investing, Southwestern Finance Association (SWFA), Paris Financial Management Conference (PFMC), EFMD Solvay Job Fair, IESE Research Workshop, IESE Brown-bag Seminar, North American Regional Science (NARSC)
Memarian, M, & Vergara-Alert, C. (2018). Urban Density and Firms’ Stock Returns. Under revision to be resubmitted to the Management Science Journal. Will be presented in World Finance Conference in Santiago, Chile, July 2019. Presented at the North American Regional Science (NARSC).