The Value of a Neighbor: The Real Impact of Neighboring Firm Valuations

Abstract

A firm’s investment responds to the stock valuations of other firms headquartered nearby. This response is stronger among financially constrained firms, is robust to controlling for the investment of other firms in the region, and is driven by the valuations of large firms. These findings are difficult to reconcile with existing theories that link investment opportunities to firm valuations, but instead suggest that a firm’s access to credit rises and falls with the valuations of other firms located nearby. Consistent with this explanation, financially constrained firms issue more debt and receive lower loan spreads when neighboring firms have higher valuations.