Geographic Location and the Pricing of Earnings

• In Event: Doctoral Student-Faculty Interchange: Financial Reporting I

Abstract

We investigate the effect of a firm’s geographic location on the market value of its reported earnings and find that rural firms’ earnings exhibit a significantly higher market valuation than their counterparts headquartered in centrally based, large cities. Earnings response coefficients demonstrate that companies leaving a large city and relocating into a distant rural area experience a significant increase in their earnings relevance levels. This higher market valuation is likely due to investor’s higher reliance on earnings for rural firms versus their reliance on local, private information for urban firms. Our main results are not driven by variations in financial reporting practices as we find no significant geographic difference in earnings quality, audit quality, or disclosure quality. Our results are also robust to managerial ability across firms, different measures of geographic dispersion, event study models, and endogeneity. Taken together, the results suggest that investors place more weight on the earnings of rural firms compared to urban companies due to their limited access to private information for these remote firms.

Authors

• Joseph A Micale, Fordham University

• Benjamin Segal, Fordham University

• Ibrahim Siraj, Long Island University-C.W. Post

• Maya Waisman, Fordham University