Financial centers and firm performance during the crisis period: Evidence from India

Abstract

How does location of a firm's headquarter impact its performance during the crisis period? This article answers this question by using the data from India. Our results show that firms headquartered in Mumbai, the main financial center (FC) of the country, significantly outperform other firms during the recent global financial crisis. We argue that firms headquartered in the FC have better information environment than other firms. One of the channels via which improvement in information environment takes place is the clustering of firms in the FC. We believe that, for any given level of resources, it is relatively cost-effective for stock market participants to expend their resources on clustered firms to obtain value relevant information than on dispersed firms, thereby improving information environment of firms headquartered in the FCs relative to other firms. Our arguments claim that better information environment of firms headquartered in the FCs helps in maintaining investors’ confidence during uncertain times. We also show that controlling for other corporate governance mechanisms (analyst following, ownership concentration, auditors, payout ratio, transactional complexity and operational complexity) does not alter the relationship between location of a firm’s headquarter and its performance during the crisis period.