The impact of headquarters location on stock returns

Diploma Thesis , 2007 , 93 Pages , Grade: 1,0

Business economics - Investment and Finance

In a time of tremendous advances in technology, it seems striking why the location of corporate headquarters should matter for the firm’s stock return. At first glance, low information and communication costs are thought to facilitate the interaction between market participants all around the world and, thus, deem the role of geographical loca-tion as marginal. This reasoning, however, does not take investors’ behavior into ac-count.
Even if over the past decades, international capital markets have widely been liberalized and the variety of investment opportunities across countries has grown substantially, many investors do not take the risk reduction potential of foreign assets into considera-tion. Despite the extensive benefits of international diversification, investors still over-weight domestic and local assets in their portfolios. Although this home bias has drawn much academic attention and its existence is commonly accepted, a satisfactory ration-ale could not yet be obtained. Further, the resulting economic implications for asset pricing remain unexplored. Yet, locality could be highly relevant for cost of capital cal-culation, asset allocation and performance evaluation.1
As a result, it is of crucial importance to investigate the relationship between portfolio holdings of investors and stock pricing patterns to shed light on a potential geographical component of asset pricing. The lack of academic research motivates to explore this area in greater detail. The purpose of this thesis is to fill the existing gap and establish a link between local bias and asset pricing. Therefore, a detailed overview of the home bias puzzle as well as of local asset pricing is presented. The economic impact of local bias on stock returns is empirically investigated. Thus, the key question of the analysis is whether the location of corporate headquarters has an impact on stock returns attributable to the local bias of investors.

Inhaltsverzeichnis (Table of Contents)

• 1 INTRODUCTION
• 1.1 Motivation and Problem Definition
• 1.2 Course of the Analysis
• 2 THE FUNDAMENTALS OF INTERNATIONAL CAPITAL MARKETS
• 2.1 The Concept of Portfolio Theory
• 2.1.1 Portfolio Optimization
• 2.1.2 International Diversification
• 2.2 Integration versus Segmentation of Capital Markets
• 2.3 The Concept of Market Efficiency
• 2.3.1 Operational and Informational Market Efficiency
• 2.3.2 Market Efficiency and Behavioral Finance
• 3 HOME BIAS AND LOCAL BIAS IN EQUITIES
• 3.1 Definition of Home Bias and Local Bias
• 3.2 Different Explanations to the Bias Puzzle
• 3.2.1 National Barriers to International Investments
• 3.2.2 Hedging of Country-specific Risks
• 3.2.3 Information Advantages of Local Investors
• 3.2.4 Familiarity
• 3.2.5 Social Interaction of Investors and Trading Patterns
• 3.3 Home Bias from a German Perspective
• 3.3.1 Benefits from International Diversification for German Investors
• 3.3.2 Actual Portfolio Holdings of German Investors
• 4 GEOGRAPHIC COMPONENT OF ASSET PRICING
• 4.1 Location of Corporate Headquarters
• 4.2 Agglomeration of Headquarters
• 4.3 Geographic Implications on Stock Returns
• 4.3.1 Fundamentals and Geographic Segmentation
• 4.3.2 Hypothesis of Local Asset Pricing
• 5 DESCRIPTION OF THE DATA SET
• 5.1 Data Selection
• 6 EMPIRICAL ANALYSIS
• 6.1 Comovement of Local Stocks
• 6.1.1 Methodology – Time-series Regressions
• 6.1.2 Results
• 6.2 Robustness Test
• 6.2.1 Resampling Method
• 6.2.2 Local Comovement versus Non-local Comovement
• 6.3 Local Comovement Attributable to Fundamentals
• 6.3.1 Methodology - Time-series Regressions
• 6.3.2 Results
• 6.4 Firm-specific and Regional Determinants
• 6.4.1 Methodology - Cross-sectional and Panel Regressions
• 6.4.2 Results
• 6.5 Limitations of the Model

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This thesis examines the impact of headquarters' location on stock returns. The main objective is to investigate the relationship between geographic factors and asset pricing, focusing on the phenomenon of local bias in investment portfolios. * The influence of headquarters location on stock returns. * The role of home bias and local bias in investment decisions. * The efficiency of international capital markets and its implications. * Analysis of empirical data to test hypotheses related to geographic asset pricing. * Limitations of current models in explaining the observed patterns.

Zusammenfassung der Kapitel (Chapter Summaries)

Chapter 1 introduces the research question and outlines the study's methodology. Chapter 2 reviews the fundamentals of international capital markets, including portfolio theory and market efficiency. Chapter 3 defines and analyzes home bias and local bias in equity investments, exploring various explanations for this phenomenon. Chapter 4 focuses on the geographic component of asset pricing, discussing the location of corporate headquarters and its implications for stock returns. Chapter 5 describes the data set used in the empirical analysis. Chapter 6 details the empirical analysis, including methodologies and results, but excludes the conclusions and final results.

Schlüsselwörter (Keywords)

This thesis focuses on the impact of headquarters' location on stock returns, exploring home bias, local bias, international capital markets, portfolio theory, market efficiency, and empirical asset pricing. The analysis uses time-series and panel regressions to test hypotheses related to geographic asset pricing. The study highlights limitations of existing models in fully explaining the observed local bias.

• College: European Business School - International University Schloß Reichartshausen Oestrich-Winkel
• Grade: 1,0
• Author: Michala Rudorfer (Author)
• Publication Year: 2007
• Pages: 93
• Catalog Number: V125573
• ISBN (eBook): 9783640312719
• ISBN (Book): 9783640316625
• Language: English
• Tags: Home Bias, Local bias, Headquarters location, Stock return