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Does Geography Matter to Bondholders?

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Maya Waisman

Fordham University Schools of Business

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

February 2007

FRB of Atlanta Working Paper No. 2007-2

We find that the location of corporate headquarters significantly affects the firm's bondholders. Similar to Loughran and Schultz (2006) and others, who show that investors are better able to obtain information on nearby companies, we look at firms located in large metropolitan cities, small cities, and rural areas and find that firms located in remote rural areas exhibit significantly higher costs of debt capital (of up to 65 basis points) in comparison to their urban counterparts. Unlike other studies that focus on the role of information asymmetries in the local bias of investors and decision makers, we are able to show that firms in remote areas experience greater costs of debt capital primarily because of a greater difficulty of monitoring their activities. We find that the adverse impact of bad corporate governance on bondholders is magnified in geographically remote firms, primarily because geographic distance reduces the effectiveness of external monitoring. Consistent with that, we show that in the private placement market, where firms are closely monitored by institutional investors, location plays no role in explaining the cross-sectional variation in the cost of debt capital across companies. We also find that the passage of the 2002 Sarbanes-Oxley Act, which brought about regulatory improvements in monitoring and governance, significantly reduced the agency costs of debt in rural firms. Taken together, our results indicate that the firm's information environment interacts with the impact of corporate governance, particularly affecting the effectiveness of external monitoring in alleviating agency problems between insiders and debt holders.

Number of Pages in PDF File: 48

Keywords: geographic location, cost of debt capital, corporate governance

JEL Classification: G10, G14, G34, G38

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Date posted: February 15, 2007  

Suggested Citation

Francis, Bill B. and Waisman, Maya and Hasan, Iftekhar, Does Geography Matter to Bondholders? (February 2007). FRB of Atlanta Working Paper No. 2007-2. Available at SSRN: http://ssrn.com/abstract=962888 or http://dx.doi.org/10.2139/ssrn.962888

Contact Information

Bill B. Francis
Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )
Troy, NY 12180
United States
Maya Waisman (Contact Author)
Fordham University Schools of Business ( email )
113 West 60th Street
Bronx, NY 10458
United States

Iftekhar Hasan
Fordham University - Gabelli School of Business ( email )
Rose Hill Campus Bronx
New York, NY 10458
United States
Bank of Finland ( email )
P.O. Box 160
Helsinki 00101
Feedback to SSRN

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