Firm location and corporate debt

Abstract

This study examines the influence of a firm's geographical location on corporate debt and provides evidence that the higher cost of collecting information on firms distant from urban areas has significant implications on a wide array of corporate debt characteristics. We find that rural firms face higher debt yield spreads and attract smaller and less prestigious bank syndicates than urban firms. Rural firms attempt to reduce their informational disadvantage by relying more on relationship banking. Our results on the effect of location on corporate debt are robust to the inclusion of an extensive set of firm and issue characteristics.JEL classification: G32; G21; G24

Local IPOs, local delistings, and the firm location premium

“…From the empirical standpoint, our results support the prior findings in the literature and expand the current understanding of the geographic components in price formation (e.g., Pirinsky and Wang, 2006;Arena and Dewally, 2012;García and Norli, 2012). The figures indicate that firm geographic location emerges as a non-negligible asset-pricing factor, which has an effect of the same magnitude on corporate market value as that of the ROE.…”

“…In the multivariate analysis, we control for (i) equity profitability (ROE) (e.g., Bagella et al, 2000), (ii) firm future growth opportunities (CAPEX-TO-ASSET) (e.g., Chua et al, 2007), (iii) firm size, defined by total assets (LN(FIRM SIZE)) (e.g., Van Dijk, 2011), (iv) firm age, defined by the number of years of a firm's life since foundation (LN(1 + FIRM AGE)) (e.g., Keloharju and Kulp, 1996), (v) firm press coverage, defined by the yearly number of newspaper articles published on the firm under consideration (LN(1 + PRESS COVER-AGE)) (e.g., Birz and Lott, 2011), and (vi) firm leverage (DEBT-TO-ASSET) (e.g., Arena and Dewally, 2012). In addition, we include in all regressions (not shown) (vii) a set of four-digit SIC industry dummies (Chou et al, 2012), (viii) a set of exchange segment listing dummies (Tse and Devos, 2004), and (ix) a set of year dummies.…”

“…Indeed, the Iindex of dispersion emerges as the most powerful proxy thus far for firm traits related to location. Recent research has amply investigated many firm traits related to firm location such as the effect of corporate geographic dispersion on liquidity or the cost of debt (among the first examples, see Loughran and Schultz, 2005;and later Loughran, 2008;Arena and Dewally, 2012). For instance, Loughran and Schultz (2005) distinguish urban from rural firms in their distance from the major U.S. metropolitan areas and find that rural stocks are less liquid than urban stocks.…”

“…For instance, Loughran and Schultz (2005) distinguish urban from rural firms in their distance from the major U.S. metropolitan areas and find that rural stocks are less liquid than urban stocks. Arena and Dewally (2012) indicate that urban firms face a lower cost of debt and attract more prestigious bank syndicates than rural firms. In addition, Gao et al (2008), Landier et al (2009), and García and Norli (2012) investigate the effects of the corporate geographic dispersion on corporate market value, corporate decision making, and stock returns.…”

Geographic location, excess control rights, and cash holdings

“…An alternative explanation of our result may be that distant firms hoard cash because they face greater financial constraints as they have high information asymmetry due to little transparency and few corporate disclosures (Ali et al, 2007;Attig et al, 2006;Fan and Wong, 2002) and/or they incur high costs of external finance (Arena and Dewally, 2012). We test this conjecture by using payout ratio as a proxy of financial constraints.…”