Geographic Dispersion and Corporate Decision-Making

Abstract:     
We document the role of geographic dispersion on corporate decision-making. First, we find that geographically dispersed firms are less employee-friendly. Second, using division-level data, employee dismissals are less common in divisions located close to corporate headquarters. Third, firms are reluctant to divest in-state divisions. To explain these findings we consider two mechanisms. First, we investigate whether proximity is related to internal information flows. We find that firms are geographically concentrated when information is more difficult to transfer over long distances (soft information industries). Additionally, the protection of proximate employees is stronger in such soft information industries. Second, we investigate how proximity to employees affects managerial alignment with shareholder objectives. We document that the protection of proximate employees only holds when headquarters is located in less-populated counties suggesting concern for proximate employees. Moreover, stock markets respond favorably to divestitures of close divisions, especially for these smaller-county firms. Our findings suggest that social factors work alongside informational considerations in making geographic dispersion an important factor in corporate decision-making.

Number of Pages in PDF File: 49

Keywords: Economic Geography, Dispersion, Employee Friendliness, Proximity, Social Interaction, Layoffs, Divestiture

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