Trade-Offs in Staying Close: Corporate Decision Making and Geographic Dispersion, forthcoming Review of Financial Studies

We investigate whether the geographic dispersion of a firm affects corporate decision making. Our findings suggest that social factors work alongside informational considerations to make geography important to corporate decisions. We show that (i) geographically dispersedfirms are less employee friendly; (ii) dismissals of divisional employees are less common in divisions located closer to corporate headquarters; and (iii) firms appear to adopt a ‘‘pecking order’ ’ and divest out-of-state entities before those in-state. To explain these findings, we consider both information and social factors. We find that firms are more likely to protect proximate employees in soft information industries (i.e., when information is difficult to transfer over long distances). However, employee protection holds only when the headquarters is located in a less populated county, suggesting a role for social factors. Additionally, stock markets respond favorably to divestitures of in-state divisions. (JEL G34, J63, R30) The locations of corporations have important consequences, fromaffecting the design of cities and local employment, to the trends of urbanization and inter-region trade. Consequently, one of the fundamental issues in economics relates to the location of production. Since, at least Marshall (1890), economists have noted that while some industries tend to cluster around a geographic region, others remain separate. This has led to the uncovering of several factors governing the choice of the corporate locations.1 However, a related aspect of economic geography—the geographic dispersion of a firm—has received little attention. Does a firm that is concentrated and localized in one region act differently from a fir