What is Location Equity

What is Location Equity?

Location equity is usually used by investor who want to start a new business because investor want to know that where should we invest our capital or equity. It’s central corporate question that why and where should firm issue equity. Numerous studies indicate that investors are better able to obtain information on nearby companies. I posit that costs in generating information will be higher for rural firms with few investors in their proximity, than for urban firms with many nearby investors. As predicted, I find that rural firms are less likely to conduct seasoned equity offerings than firms located in urban areas.
Several studies demonstrate that investors earn higher returns on investments in local companies than on investments in more distant companies. Put another way, being located far from a company may put an investor at an information disadvantage that is clearly measurable in returns. Other studies show that security analysts who are located closer to a company produce more accurate earnings forecasts than analysts who are located at a greater distance. It may, therefore, be easier for urban firms to raise money by selling equity, and they may be more likely to return to the equity market for additional capital.
A rural location may make a potential issuer undesirable to the best underwriters for two reasons. First, a rural location may make it more difficult or expensive for underwriters to gather information on issuers. Investment bankers, lawyers, and auditors would be forced to spend more time traveling to conduct needed due diligence.
Investment bankers provide less analyst coverage for rural firms than similar urban companies. Second, selling a rural issue may be more difficult because the investment banker’s clients are less likely to be familiar with the firm. Under these circumstances, a rural issuer is likely to be forced to go with an underwriter who cannot be as selective.