Geographic Concentration of Firm’s Income-Producing Assets and Stock Returns

A growing literature on how economic decision making is influenced by firms’ geographic location has emerged. We add to this stream of research by assessing the effects of geography in an asset pricing context from the firm’s perspective. We introduce a new concept of location for asset pricing accounting for the location of firms’ income-producing assets and use the information of the assets’ geographic allocation to provide a trading strategy. We use real estate and mining companies in the US to map the extract location of their income-producing assets – the properties and the mines – and to distinguish between firms with concentrated and dispersed business operations as defined by the Herfindahl index. We find that the dispersion of firms’ income-producing assets has a positive effect on returns yielding an alpha. On the other hand, concentrated firms underperform the market. Those vary with size and specialisation degree of the firms with small and specialised firms being more strongly negatively affected by the concentration effect and large and don-specialised firms more strongly positively affected by the dispersion effect. The research provides new insights into the role of location for asset pricing and shows that asset concentration can be a useful tool for strategic investment. The findings are in line with the information asymmetry theory that investors need to be rewarded for investing in a company for which it is hard to obtain and assess information about the firm’s assets due to its dispersion.