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RFS Advance Access originally published online on September 20, 2007
Review of Financial Studies 2009 22(3):1119-1148; doi:10.1093/rfs/hhm042
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© The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Trade-offs in Staying Close: Corporate Decision Making and Geographic Dispersion

Augustin Landier
Stern School of Business, New York University

Vinay B. Nair
Wharton School, University of Pennsylvania

Julie Wulf
Harvard Business School, Boston

Address correspondence to Julie Wulf, Harvard Business School, Soldiers Field Road, Boston, MA 02163, or e-mail: jwulf{at}hbs.edu

JEL Classification: G34, J63, R30


  Abstract

We investigate whether the geographic dispersion of a firm affects corporate decision making. Our findings suggest that social factors work alongside informational considerations to make geography important to corporate decisions. We show that (i) geographically dispersed firms are less employee friendly; (ii) dismissals of divisional employees are less common in divisions located closer to corporate headquarters; and (iii) firms appear to adopt a "pecking order" and divest out-of-state entities before those in-state. To explain these findings, we consider both information and social factors. We find that firms are more likely to protect proximate employees in soft information industries (i.e., when information is difficult to transfer over long distances). However, employee protection holds only when the headquarters is located in a less populated county, suggesting a role for social factors. Additionally, stock markets respond favorably to divestitures of in-state divisions.

We would like to thank Joshua Coval, Itay Goldstein, Raghuram Rajan, Michael Roberts, Antoinette Schoar, Todd Sinai, Per Stromberg, an anonymous referee and seminar participants at the Swedish Institute of Financial Research, Wharton, University of Texas, NYU, and the NBER Corporate Finance Meetings for helpful comments/discussions.


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