The Effect Of Geography On Firm 's Characteristics And Financial Decisions

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The paper relates to three sets of literature: the capital structure, the location effect, and the peer effects literature. In the classical capital structure context, Fischer, Heinkel, and Zech-ner (1989) and Leland (1994), (1998), Hovakimian, Opler, and Titman (2001) show that firms periodically readjusts their capital structures toward a target ratio. Lemmon, Roberts, Zender (2008) show that the majority of changes in leverage ratio is caused “by an unobserved time-invariant effect that generates surprisingly stable capital structures.” Lemmon, Roberts, Zender (2008) show that this factor is present before the IPO. They conclude that “variation in capital structures is primarily determined by factors that remain stable for long…show more content…
They show that level of information asymmetry is higher for rural firms. Rural firm issue fewer seasoned equity offerings, it takes them more time to do an IPO, and they use more debt. Ivkovic and Weisbenner (2005) examine the stock investments of over 30,000 households in the U.S. between 1991 and 1996. They find that the “average household invests 31% of its portfolio in stocks located within 250 miles. If investors had held the market portfolio instead, only 13% of the average household’s investments would be this close.” Geography will affect coverage by security analyst, which in turn will affect the firm’s ability to attract investors in the market. Malloy (2005) concludes that analysts are more accurate when they cover geographically close firms. There is also an established literature on the effect of headquarters’ location on the firm’s ability to finance itself through debt. In general, conditions of loan are related to the distance between the borrower and the lender on one hand and the distance between the borrower and the closest competitor on the other hand. Arena and Dewally (2011) show that firm’s geographical location has a significant effect on corporate debt policies. They show that rural firms have higher debt yield spreads and attract smaller and less prestigious bank syndicates, compared with urban firms. As a result, the rural firms
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