Does Geography Matter to Bondholders?
49 Pages Posted: 24 Aug 2008
Date Written: August, 22 2008
This study investigates the effect of geography on bondholders. Based on previous empirical evidence that associates information gathering costs to distance, we argue that when bondholders perceive corporate information of remote firms to be more difficult to obtain and monitor, they assign these firms a higher likelihood of withholding value relevant unfavorable information, and charge a higher risk premium. As predicted, we find that firms headquartered in remote rural areas, with few nearby investors, exhibit significantly higher costs of both private and public debt capital (of up to 52 basis points) in comparison to similar firms headquartered in urban, highly populated areas. Our findings hold when we control for information dissemination and monitoring factors that are associated with big cities, and are especially strong for firms with entrenched managers, bond issues without protective covenants in place, issues of non investment grade debt, and those made before the passage of the Sarbanes Oxley corporate reform Act.
Keywords: Geography, Bondholders, Risk Premium
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