The Effect of Industry Co-Location on Management’s Communication and Analysts’ Information Acquisition Costs

• In Event: "Non-Traditional" Effects on the Firms' Information Environment
  In Paper Session: Non-Traditional Effects on the Firms' Information Environment

Abstract

We examine how the co-location of firms in the same industry affects management’s communication with external market participants and analysts’ cost of gathering and processing information. The prior research finds evidence consistent with increased knowledge sharing between firms that are in the same geographic area. We examine whether managers communicate their knowledge about other firms in the same industry and geographic location to analysts and investors. Consistent with our prediction, we find that the likelihood of managers referencing another firm in the same industry increases as the distance between them decreases. We also argue that the increased knowledge sharing between firms in the same geographic area affects the information set of financial analysts. Consistent with this conjecture, we find that analysts follow fewer firms when following firms located farther away from other firms in the same industry and that these firms have lower analyst following and less timely forecast revisions. We also find that the difficulty of forecasting earnings increases the additional costs that analysts incur when following distant firms. Finally, we provide evidence that managers attempt to partially offset the increased analyst costs by providing more voluntary disclosure: firms that are farther away from other firms in the same industry have a higher likelihood of providing earnings guidance. This paper provides additional evidence that the co-location of firms in the same industry not only affects operating and strategic decisions (as documented in the existing literature) but also managers’ communication with external market participants as well as analysts’ costs of gathering and analyzing information.

Authors

• Jared Jennings, Washington University in St. Louis

• Joshua Alan Lee, Washington University

• Dawn Matsumoto, University of Washington-Seattle