45 Pages Posted: 4 Oct 2017 Last revised: 28 Dec 2019
Date Written: December 23, 2019
In this paper we present new evidence on the relation between geographic diversification and firm risk using granular data on corporate locations. After accounting for determinants of geographic diversification, we find that geographically complex firms exhibit significantly higher risk than their focused peers. The findings are consistent with the hypothesis that geographically complex firms involve higher information and monitoring costs. The results are not consistent with the hedging hypothesis, which predicts a reduction in risk as a result of geographic diversification of cash flows and business risk. The effects have a significant economic magnitude and are stronger in the presence of business diversification, which also increases a firm’s complexity. The results continue to hold for firms of varying size and cannot be explained by other firm, industry, and local factors.
Keywords: firm complexity, geographic diversification, information frictions, location, credit quality
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation