Abstract

We investigate the effects of geography on firm performance and agency costs. We argue that non-urban firms, which located in sparsely populated areas, have location disadvantages. Shareholders can’t efficiently oversee the management of non-urban firms because of the long distance. Using a sample of 1036 Chinese private firm observations for the year 2013, we do univariate tests and multivariate regressions to study the relationships between location dummy (equals to 1 if firms are urban-located and 0 otherwise) and firm performance. We find that urban firms have better corporate governance structure, lower agency costs and better firm performance measured by Tobin’s Q. We then substitute location dummy with population size of the city to do robustness tests. The results show that firms located in populated areas perform better and have lower agency costs. According to agency literature, firms pay higher dividends to mitigate the increased agency costs. So we study the dividend policy of urban firms and non-urban firms to study whether non-urban firms have adjusted their corporate policies to solve their severe agency conflicts. Consistent to agency literature, we find that non-urban firms, which have more information problems and agency costs, pay higher dividends.