Abstract
This study investigates the relationship between the location of a firm’s headquarters and its capital structure. Using the equity shock of peers firms, with peers referring to location, this study eliminates endogeneity concerns and shows that average idiosyncratic return of peers firms, firms in the same state, determines variation of firm's leverage ratio. Furthermore, using two measures of location, average leverage of firms in the state where the firm is domiciled and average leverage of firms with distance less than 50 miles from firm's headquarters, the study demonstrates that location has a significant effect on the firm's leverage ratios. The location effect is persistent and extends back to the time of the initial public offering. This work concludes that location of headquarters is an essential component of how a firm defines its peers group.
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