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Atlanta Fed Working Papers

Does Geography Matter to Bondholders?

Bill Francis, Iftekhar Hasan, and Maya Waisman
Working Paper 2007-2
February 2007

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We find that the location of corporate headquarters significantly affects the firm’s bondholders. Similar to Loughran and Schultz (2006) and others, who show that investors are better able to obtain information on nearby companies, we look at firms located in large metropolitan cities, small cities, and rural areas and find that firms located in remote rural areas exhibit significantly higher costs of debt capital (of up to 65 basis points) in comparison to their urban counterparts. Unlike other studies that focus on the role of information asymmetries in the local bias of investors and decision makers, we are able to show that firms in remote areas experience greater costs of debt capital primarily because of a greater difficulty of monitoring their activities. We find that the adverse impact of bad corporate governance on bondholders is magnified in geographically remote firms, primarily because geographic distance reduces the effectiveness of external monitoring. Consistent with that, we show that in the private placement market, where firms are closely monitored by institutional investors, location plays no role in explaining the cross-sectional variation in the cost of debt capital across companies. We also find that the passage of the 2002 Sarbanes-Oxley Act, which brought about regulatory improvements in monitoring and governance, significantly reduced the agency costs of debt in rural firms. Taken together, our results indicate that the firm’s information environment interacts with the impact of corporate governance, particularly affecting the effectiveness of external monitoring in alleviating agency problems between insiders and debt holders.

JEL classification: G10, G14, G34, G38

Key words: geographic location, cost of debt capital, corporate governance


The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Bill Francis, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 Eighth Street, Troy, NY 12180, 518-276-3908, francb@rpi.edu; Iftekhar Hasan, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 Eighth Street, Troy, NY 12180, 518-276-2525, hasan@rpi.edu; or Maya Waisman, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 Eighth Street, Troy, NY 12180, waismm@rpi.edu.

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