Download This PaperDo Firms Respond Differently to Local Competition? Evidence from Textual Analysis of 10-K Filings
73 Pages Posted: 7 Mar 2017 Last revised: 15 Dec 2020
Date Written: December 15, 2020
Abstract
A firm is typically characterized as competing at the country-level, facing the same level of competition regardless of the locations in which it competes. However, an average firm operates in only five out of 50 U.S. states and the intensity of rivalry varies across states. This raises an important question: Do firms weight the rivalry from their local competitors more than distant competitors? To address this question, we develop a text-based firm-specific measure of localized competition based on firms' disclosures about operationally relevant U.S. states in 10-K filings. We validate this measure using major customer and U.S. Census data, and document its association with the rate of mean reversion of profitability. We find localized competition explains innovation and cash policies incremental to broad-based measures of competition used in prior literature. Relevance of localized competition is greater in industries with high geographic segmentation and for firms that have smaller geographic footprints than the industry as a whole. Our results suggest firms can be better characterized as competing in several local markets.
Keywords: Geography, Product Market Competition, Text-based Analysis
JEL Classification: R32, D40, D22, D24
Suggested Citation: Suggested Citation
Alper Darendeli (Contact Author)
Nanyang Technological University ( email )
Nanyang Business School, S3-B1C-85
Nanyang Ave
Singapore, Singapore 639798
Singapore
+65 67906147 (Phone)