Trade-Offs in Staying Close: Corporate Decision Making and Geographic Dispersion

Abstract

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 dispersed firms 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.

Keywords: G34, J63, R30