We showthatpoliticalgeographyhasapervasiveeffectonthecross-sectionofstock
returns.Wecollectelectionresultsovera40-yearperiodanduseapoliticalalignment
index(PAI) ofeachstate’sleadingpoliticianswiththeruling(presidential)partyto
proxy forlocalfirms’proximitytopoliticalpower.Firmswhoseheadquartersare
locatedinhigh PAI states outperformthoselocatedinlow PAI states, bothintermsof
rawreturns,andonarisk-adjustedbasis.Overall,althoughwecannotruleoutindirect
politicalconnectednessadvantagesasanexplanationofthe PAI effect,ourresultsare
consistentwiththenotionthatproximitytopoliticalpowerhasstockreturnimplica-
tionsbecauseitreflectsfirms’exposuretopolicyrisk.
