We examine the relation between the social ties between firms’ headquarters locations and comovements between their fundamentals and stock returns. Our evidence indicates that firms in the same industry with socially connected locations exhibit co-movement in fundamentals and stock returns that exceed those without socially connected locations. However, the stock returns reflect the location information with a lag. To exploit this lagged relationship, we form portfolios that buy (sell) stocks when their socially-weighted industry peer returns in the previous month is high (low). The value-weighted version of this portfolio generates a monthly alpha of 84 basis points. Social peer firm returns also predict firms’ future earnings surprises, analysts’ forecast errors, and earnings announcement returns. Further evidence indicates that the mispricing is stronger for low-visibility firms and for firms located outside of industry clusters, and that the effect is not subsumed by other sources of return predictability.

zcarol2@ceibs.edu