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Geographical Vibrancy and Firm Performance

Author

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  • Ovtchinnikov , Alexei
  • Cooper , Michael

Abstract

Recent work has shown that where a firm is located matters for such things as dividend and investment policy, governance, liquidity, equity and debt issuance, and risk exposure. These effects seem to exist, in part, because of managements' desire to minimize agency problems related to monitoring and relationship building that vary as a function of firm distance from agents. The authors expand the current location literature by showing that firm location characteristics, not just distance per se, are important. They develop a geographical-based vibrancy index using important location characteristics from the Urban Economics literature that measure local economic health. We show that the vibrancy index not only predicts firm policy variables such as investment and leverage, but also predicts firm performance and firm value. The local effects are strong, adding up to a 50% increase in explanatory power above industry effects. Our results indicate that the local vibrancy of a firm headquarters is an important determinant of firm policies and profitability.

Suggested Citation

  • Ovtchinnikov , Alexei & Cooper , Michael, 2015. "Geographical Vibrancy and Firm Performance," HEC Research Papers Series 1090, HEC Paris.
    • Handle: RePEc:ebg:heccah:1090
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    Keywords

    geography; firm location; vibrancy; firm characteristics; firm performance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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