Are big city businesses more profitable than other firms?

Abstract

Purpose– The purpose of this paper is to focus upon the financial performance of firms that maintain headquarters in the largest cities and firms based in smaller metropolitan areas. Big city locations offer numerous opportunities. On the other hand, maintaining headquarters in big cities is more costly than in less congested locations and the opportunities for distractions tend to be higher. A third alternative is that location does not matter.Design/methodology/approach– The study, the first of its type, applies a multivariate analysis to a large sample of Compustat firms. The analysis tests for the industry-adjusted return on investment as a function of population density.Findings– The results, which are both statistically and economically significant, show that firms headquartered in smaller cities tend to outperform those located in major business centers.Practical implications– These results suggest at least two implications for financial managers. One is that headquarters location should be considered as a key element of financial management strategy. The second is that businesses should very carefully consider decisions to move headquarters to the very largest cities.Originality/value– Theory suggests that business success should increase with the size of the city. This paper, the first large-sample examination of major US firms, shows that businesses with headquarters in smaller locations tend to enjoy greater financial success.