The initial US stock market effect on firms that announce corporate headquarters relocation

Abstract

PurposeTo examine the initial stockholder wealth impact of firms announcing corporate headquarters relocation.Design/methodology/approachThe LexisNexis Academic database were searched from December 1994 to April 2005 for US firms announcing headquarters relocation. The companies were then categorized according to the rationale (cost/consolidation, space, managerial interests, none given) for moving. Standard event study methodology, market‐model version of the capital asset pricing model, was employed to ascertain the impact of this event to stockholders.FindingsIn general, the stock‐market reaction is favorable for companies moving their head office. Moreover, stockholders react most positively to the managerial interest reason for such a shift. Nevertheless, the cost/consolidation reason and to some extent even when no reason is given shareholders viewed relocation announcements with an increase in stock returns. However, when space reasons are given for headquarters relocation, the stock returns are negative.Research limitations/implicationsThe sample is restricted to the USA and may not be reflective of other countries. Also, this study focuses on the initial stockholder wealth impact which may not be reflective of the long‐run effect of corporate headquarters relocation.Practical implicationsOrganizations considering moving their head office should evaluate their decision based on the perception of their shareholders and how they may react to such announcements. Changes in the market value of the equity, caused by headquarters relocation, will have a direct impact on the firm's ability to raise capital.Originality/valueThis paper updates empirical research in the field and provides contrary evidence of the rationale that generates a favorable stock‐market reaction.