Value Relevance and Geographic Location: New Evidence

Abstract

We revisit the relationship between financial reporting and firm value through the lens of geographic location, which directly impacts investors access to private information. We investigate the effect of firms’ geographic locations vis-à-vis large concentrations of potential investors on the association between earnings and stock prices, finding that rural firms’ value relevance of earnings is significantly stronger than that of firms headquartered in central, large cities. We find that this phenomenon is driven by investors’ higher reliance on publicly available earnings for remote, rural firms versus their reliance on local, private information for urban companies. We support this explanation with two distinct exogenous shocks to investor information: industry shocks to institutional investor portfolios and analyst coverage losses from brokerage house mergers. Furthermore, we find evidence of private information leakage for urban firms prior to earnings announcements, but not for rural companies. Taken together, our results show that firm location has a significant effect on the importance and use of corporate reporting, with implications for users, preparers and policy makers.

Keywords: Geographic Location, Value Relevance, Earnings, Market Pricing

JEL Classification: M41, G12, G14, M40