Overlapping Real Asset Networks and Corporate Investment

Abstract

This study shows how the interconnected real asset networks among corporations affect their corporate investment. We develop a theoretical model that predicts commonalities resulting from a firm’s asset network will lead to higher optimal investment, and we empirically test these predictions using spatial econometrics and network methods. Controlling for both industry and headquarters co-investments, we find a 1% increase in the instrumented asset network co-investments relative to its long-term average is associated with a 0.35% increase in the typical firm’s rate of investment. Although most prior research uses the headquarters locations of two firms as a proxy for geographic connectivity, we find that the geographic overlap of their assets (subsidiaries) is more important than headquarters connectivity. We further show that our findings are not driven by non-tradable goods and services sectors nor by firms whose subsidiary networks are tilted toward states that are expected to produce faster economic growth. Importantly, we find that our documented asset network effect prevails among firms with higher corporate real estate holdings, which can be pledged as collateral for debt financing. A 1% increase in the debt issuance of companies in a firm’s asset network relative to its long-term average is associated with a 0.37% increase in a firm’s debt issuance. Our findings are robust to alternative specifications and omitted variable tests. Overall, our findings have important implications for assessing the effects of the locational boundary of firms, their overlapping locational networks, and their peer effects on firm corporate financial policy decision-making.

Keywords: Corporate investment, firm asset networks, headquarters, collateral channel

JEL Classification: G01, G11, G14