News Release

Firm location determines equity issuance

Seasoned equity offerings less common for rural firms

Peer-Reviewed Publication

Wiley

Notre Dame, IN – June 24, 2008 – A new study in the journal Financial Management reveals that firms in rural areas are less likely to issue equity than firms in urban areas. In addition, rural firms that do issue equity use lower-quality underwriters.

Tim Loughran, Professor of Finance at the University of Notre Dame, compared equity issuance by firms in urban areas, defined as the 10 largest metropolitan areas of the U.S., and rural areas, defined as at least 100 miles from the center of any metropolitan area of 1,00,000 people or more.

Seasoned equity offerings are significantly less common for rural firms. Similarly, firms with lengthy drives to the nearest major airport are less likely to issue equity.

Rural companies have few potential purchasers of stock located nearby. Therefore, the marginal investor for an equity offering by a rural firm is likely to be located quite a distance away. This puts the equity investor in a rural offering at a more significant information disadvantage to insiders than an equity investor in an urban company's offering.

Also, underwriters used by rural firms and firms located far from major airports tend to be less prestigious. This evidence is consistent with the assertion that the location of a firm's headquarters affects its ability to issue equity and plays a role in the ability of the firm to select quality underwriters for any offerings.

"Firms from rural areas are less likely to conduct a follow-on offering, even after adjusting for firm size, prior stock returns, book-to-market ratios, and other factors," the authors conclude. "Geographic location is closely related to information asymmetries."

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This study is published in the Spring 2008 issue of Financial Management. Media wishing to receive a PDF of this article may contact journalnews@bos.blackwellpublishing.net.

Tim Loughran is affiliated with the University of Notre Dame and can be reached for questions at tloughra@nd.edu.

Financial Management serves both academics and practitioners concerned with the financial management of nonfinancial businesses, financial institutions, and public or private not-for-profit organizations.

Wiley-Blackwell was formed in February 2007 as a result of the acquisition of Blackwell Publishing Ltd. by John Wiley & Sons, Inc., and its merger with Wiley's Scientific, Technical, and Medical business. Together, the companies have created a global publishing business with deep strength in every major academic and professional field. Wiley-Blackwell publishes approximately 1,400 scholarly peer-reviewed journals and an extensive collection of books with global appeal. For more information on Wiley-Blackwell, please visit www.blackwellpublishing.com or http://interscience.wiley.com .


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