Overlapping Real Asset Networks and Corporate Investment

Abstract

This study shows how the interconnected networks of real assets among corporations affect their corporate investment choices, which highlights the importance of asset networks in determining firm investment. We first develop a theoretical model that predicts commonalities resulting from a firm’s asset network will lead to higher optimal investment, and we 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. We also find that the effect of the headquarters network (asset network) on firm investment decays (increases) with the extent of a firm’s geographic complexity (gauged by the number of locations in which a firm has a physical presence). We further show 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