Urban Density and Firms’ Stock Returns∗

Firms located in dense urban areas experience higher productivity due to the flow of ideas and innovation in these areas. Through this productivity channel, the urban density characteristics of the areas in which firms are located affect their stock returns. We use high-resolution satellite images from Google Earth to develop an exogenous measure of potential density increases (PDIs) for the 95 most populated metropolitan statistical areas (MSAs) in the US. This measure represents the proportion of the total area within a one-hour drive from the center of the MSA that could rapidly increase its building density. We find that firms located in areas with high PDIs present lower stock returns. On average, a 10% higher PDI for an MSA results in 0.33% lower excess stock returns for firms located in that MSA.