Firm Complexity: The ‘Dark Side’ of Geographic Diversification

45 Pages Posted: 4 Oct 2017 Last revised: 23 Jul 2019

See all articles by Anzhela Knyazeva

Anzhela Knyazeva

Independent; New York University (NYU) - Leonard N. Stern School of Business

Diana Knyazeva

Independent

Date Written: July 22, 2019

Abstract

In this paper we analyze the effects of geographic diversification on firm risk using a new dataset containing granular information on firm geographic locations. After accounting for determinants of geographic diversification, we find that geographically complex firms are characterized by significantly higher risk, reflected in lower credit quality, than their locally focused peers. The findings are consistent with geographically complex firms having higher information and monitoring costs. The higher risk of geographically diversified firms is not consistent with the hedging hypothesis that predicts a reduction in risk as a result of geographic diversification of cash flows and business risk. The identified effects are economically important and are more pronounced in the presence of business diversification. The results hold for firms of varying size and cannot be explained by business diversification or other firm, industry, and local factors.

Keywords: firm complexity, geographic diversification, information frictions, location, credit quality

JEL Classification: G30, G32, G34

Suggested Citation

Knyazeva, Anzhela and Knyazeva, Diana, Firm Complexity: The ‘Dark Side’ of Geographic Diversification (July 22, 2019). Available at SSRN: https://ssrn.com/abstract=3046849 or http://dx.doi.org/10.2139/ssrn.3046849

Anzhela Knyazeva (Contact Author)

Independent ( email )

No Address Available

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Diana Knyazeva

Independent ( email )

No Address Available

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