Stay Concentrated to Survive

Abstract

Using a text-based measure as proxy for a firm’s geographically dispersed business interests, we document that geographic dispersion increases the probability of failure risk for newly listed firms. We find that the effect is more pronounced in a soft information environment where information is not easily transferrable or verifiable over long distances, and in small communities where managerial social concerns dominate in decision-making. Moreover, we find that firms with spatially distributed business interests are negatively associated with post-IPO operating performance. Overall, the results are consistent with the argument that geographically dispersed firms are subject to internal information asymmetry and divert managerial focus away from shareholder value, which negatively affects corporate performance and eventually results in corporate failure. Our study suggests to corporate world, stay concentrated to survive. JEL classification: G10; G33; R30