Citation:
Abstract:
Changes in local economic conditions can have important impacts on the performance and investment decisions of firms operating there. The spatial distribution of firms' current assets can therefore be a determinant of overall firm outcomes. I use a sample of 285 publicly traded retail, restaurant, hotel, and entertainment service chains from 1997 to 2016 to study the effect of quarterly state-level income growth on firms, exploring variation in the geographic location of stores. I find that firms with more stores in high-growth states have higher sales growth contemporaneously and higher predictable stock returns subsequently. In addition, firm expansion is positively associated with past state-level income growth. While higher investment sensitivity to positive past local income growth does not lead to higher future revenue growth, it is associated with a small increase in profitability. The results suggest that regional economic conditions are important for firm performance, but are under-weighted by investors and managers.