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American Finance Association
Financial Structure, Acquisition Opportunities, and Firm Locations

Author(s): ANDRES ALMAZAN, ADOLFO DE MOTTA, SHERIDAN TITMAN and VAHAP UYSAL
Source: The Journal of Finance, Vol. 65, No. 2 (APRIL 2010), pp. 529-563
Published by: Wiley for the American Finance Association
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THE JOURNAL OF FINANCE
Financial
VOL. LXV, NO. 2 APRIL 2010
Structure, Acquisition
and Firm Locations
ANDRES
ALMAZAN, ADOLFO DE MOTTA,

and VAHAP UYSAL*
Opportunities,
SHERIDAN
TITMAN,
ABSTRACT
the relation
paper
investigates
finance decisions. We develop a model
This
increases
opportunities
clusters maintain
within
between
firms' locations
and their corporate
being located within an industry cluster
tomake acquisitions,
and to facilitate those acquisitions,
firms
more financial slack. Consistent
with our model we find that
where
and have
lower debt
industry clusters make more acquisitions,
cash balances
than their industry peers located outside
clusters.
that firms in high-tech
more
cities and growing
cities maintain
firms located within

ratios
We
and
larger
document
also
financial
slack.
firms' financial
Overall,
decisions.
the evidence
suggests
that growth
opportunities
influence
In 1992, the apache

then a small oil and gas firm located in
corporation,
a subsidiary of Amoco Corporation,
Denver
a
(CO), acquired MW Petroleum,
major integrated oil company. This acquisition, which more than doubled the
size of its oil and gas reserves, was viewed by Apache's
as a
top management
future strategy: to grow
major success, and to a large extent defined Apache's
oil and gas fields from the major integrated oil firms. To
by acquiring mature
to Houston
implement this strategy Apache moved from Denver
(TX), where
most of the major oil firms had operations, and reduced its debt ratio to im
believed
prove its credit rating. By locating in Houston, Apache's management
that they would have better access to and knowledge
about potential deals.
an investment grade bond rating (Apache had a B rating when
Maintaining
and reached an A rating a few years later) was
they acquired MW Petroleum
*
Andres
is from the University

of Texas. Adolfo de Motta
is from McGill
University.
of Texas and the National
Bureau
of Economic
Research.
of Oklahoma.
We would
like to thank for helpful comments:
Vahap Uysal
Alberto Abadie,
Jason Abrevaya,
Louis Ederington,
Chitru
Aydogan
Alti, Matthias
Buhlmaier,
Lorenzo
Charles
Simi Kedia,
Fernando,
Scott
(the Editor),
Hadlock,
Garlappi,
Campbell
Harvey
Gordon Phillips, Roberto Rigobon, Pradeep
an anonymous
associate
Lynn, Bill Megginson,
Yadav,
at Baylor University,
Boston
editor, an anonymous
referee, and seminar
participants
College,
Columbia
Drexel University,
Fundacion
Rafael
Brigham Young University, UC-Irvine,
University,
del Pino, Princeton University,
Texas Christian University, Universidad
Carlos
Rutgers University,
Sheridan
Almazan
Titman
III, University
of Essex,
University
ofMichigan,
of Oklahoma,
of Southern
University
University
Graduate
School of Finance, WFA-Hawaii,
and York Uni
for its financial support.
California,
UT-Dallas,
UT-Austin,Vienna
thanks IFM2
versity. Adolfo de Motta
529

530
The Journal
ofFinance?
as essential, since their acquisition

by Apache's management
strategy
an
to
raise
ability
capital on relatively short notice.1
required
case suggests, a firm's acquisi
This paper examines whether, as the Apache
tion and financing choices are related to its location. More specifically, we exam
ine whether these choices are related to whether the firm is located within an
industry cluster, that is, close to many of its industry peers. To study these is
sues, we start by developing a simple model that describes the relation between
a firm's location, financial structure, and acquisition activities. Consistent with
viewed
that firms located in industry clusters

experience, our model assumes
Apache's
have more acquisition
but
also face greater competition from
opportunities
of these opportunities
other potential acquirers. To take advantage
the firms in
clusters maintain more financial slack, because by doing so they can bid more
for acquisitions.
aggressively
To test this model, we examine the extent to which firms located in industry
clusters are more acquisitive,
the interaction between financial structure, loca
and
and
the extent towhich firms in clusters maintain
tion,
acquisition activity,
more financial slack. Since an industry cluster is somewhat of a nebulous
con
our
our
tests
with
examine
the
robustness
of
results
respect to
cept,
empirical
a number of cluster definitions. One set of definitions uses the absolute number
area. A second set defines clus
of firms within an industry in a metropolitan
area.
ters as the proportion of firms in an industry located in the metropolitan
we
an
of
the
software
code
do
737)
industry (SIC
Finally,
in-depth analysis
since this is an industry with a large number of firms and a very well-defined
industry cluster in Silicon Valley.

We find that after controlling for industry affiliation, firms located in clusters
make more acquisitions, which is consistent with the idea that firms in clusters
in previous
In addition, as documented
have more opportunities.
research,
we find that firms with more financial slack tend to make more acquisitions,
more slack when opportunities
is consistent with firms maintaining
which
we
are greater. More
show
that
the positive relation between
importantly,
slack
is
financial
and
stronger in clusters. If we assume
activity
acquisition
that competition for targets is more intense in clusters then this finding is
consistent with our model's
implication that debt plays a more important role
the fact that this relation is stronger for
when there is competition. Moreover,
and
within
of
industry targets, which are likely to
public targets
acquisitions
attract more competition, provides further support for this implication of the
model.
While
the evidence on the relation between location and acquisition activity is

consistent with our model, our empirical analysis focuses mainly on the relation
between a firm's choice of financial slack and whether the firm is located in a
cluster. Our results indicate that firms in clusters have less debt and hold more
cash, and these relations continue to hold after controlling for the empirical
1
The
MW
above
Petroleum
Chambers,
discussion
Corp.
Apache's
is based
on three Harvard
B, and Risk Management

Vice President.
Executive
Business
at Apache)
and
(MW Petroleum
discussions
extensive
Cases

Corp. A,
with Tom
Financial
Opportunities,
and Firm Locations
531
determinants
of capital structure (e.g., Titman and Wessels
(1988) and Rajan
et
al.
in the extant
and Zingales
(1999))
(1995)) and cash holdings
(e.g., Opler
financial slack and location is particularly
literature. The relation between
robust and economically
of
significant. After controlling for other determinants
in
net
structure
cash
firms
located
and
decrease
their
clusters
capital
holdings,
market
leverage by 19% and increase their cash holdings by 43% with respect
to the sample averages.
These findings, which provide evidence against the null hypothesis
that cor
are
can
finance
of
decisions
be
porate
location,
independent
interpreted in
at least two ways. First, the evidence
is consistent with the idea that loca
tion affects acquisition
and
that these in turn influence capital
opportunities
structure choices (i.e., a direct-cluster effect). Alternatively,
these findings may
reflect the possibility that firms that choose to locate either within or outside of
clusters have fundamentally
different characteristics
(i.e., a cluster-selection
are
to
and
that
these
characteristics
the
related
effect),
tendency of firms to
as well as their capital structure choices.2
make acquisitions
In order to address
the possibility that a cluster-selection
effect is driving
our findings, we replicate our analysis
on a sample of firms that have been
in a given location formore than 10 years and find that the relation between
location and corporate finance choices continues to hold.3 To the extent that the
unobserved
characteristics
that influence a firm's location choice become less
over
this
evidence
time,
important
suggests that the findings are determined
more by a direct-cluster effect than by a cluster-selection
effect.
our
on
concentrates
Although
analysis
industry clusters, there are other ge
are
that
also
characteristics
ographical
likely to affect firms' investment and
For example, firms may find it easier to grow and
acquisition
opportunities.
innovate in regions where other firms are also growing and innovating. Hence,
iffirms tend tomaintain financial slack in anticipation
of growth opportunities,
in
to
addition
the
cluster
other
attributes
then,
effect,
may be related
regional
to debt ratios and cash holdings. We examine this issue by considering
sev
eral measures
of economic activity in the metropolitan
statistical area (MSA).
and the
Specifically, we include MSA growth rates, MSA R&D
expenditures,
our
of
firms
within
the
in
MSA
ratio
debt
and
cash
acquisitiveness
holdings
regressions. The regression results indicate that there is indeed a positive rela
tion between the use of financial slack and being located in a growing and more
innovative region. However, the cluster effect is significant even after including
these other regional variables,
suggesting that the cluster effect captures more
than just the effect of growing regions.
By linking a firm's location to its corporate finance decisions we contribute to
the literature in corporate finance that examines
the relation between invest
ment opportunities and financing choices. In this sense, our analysis is related
2
as Almazan,
For example,
de Motta,
and Titman
are likely to attract
(2007)
show, clusters
firms with attributes
that make
them more
likely to succeed.
3
Even though firms may originally self-select into different locations, their choice of location can
be considered
almost permanent.
For instance, Pirinsky
and Wang
(2006) show that in the period
from 1992 to 1997 less than 2.4% of firms in Compustat
their headquarters'
location.
changed

532
The Journal
ofFinance?
to Harford (1999), who shows that firms with more cash do more acquisitions.
His empirical tests are motivated
literature that suggests
by the theoretical
that reduced financial slack can limit a firm's ability to fund new investments
(Myers (1977),Myers and Majluf (1984), Jensen (1986), and Hart and Moore
(1995)). However, as is also recognized in this literature, firms anticipating good

investment opportunities have an incentive to maintain
financial slack, which
ac
that
between
cash
observed
relation
the
suggests
holdings and acquisition
arise
accumulate
financial
slack
when
have
because
firms
they
tivity might
relation between
acquisition
Empirically,
although a negative
opportunities.
ratios?a
market-to-book
commonly used proxy for growth opportunities?and
the direction of causation between
debt ratios has been previously established,
not
has
been
and
financial
slack
fully resolved. The current lit
opportunities
erature provides evidence of an effect running from debt choices to investment
choices.4 In contrast, by comparing the capital structure choices of firms in
different locations, our tests provide evidence of an effect running from invest
ment opportunities
to the choice of financial slack. In particular, since cluster
and regional growth effects are likely to be directly related to growth opportuni
ties but can be viewed as exogenous with respect to the firm's capital structure
choice, the documented relation between geography and financial slack is likely
to arise from the effect that the presence of potential opportunities
produces
on a firm's desire tomaintain
financial slack.
We also contribute to the literature that examines how asset liquidity influ
ences financial structure. Within this literature Williamson
(1988) and Shleifer
and Vishny (1992) propose a collateral channel, which suggests that firms are
able to obtain more debt financing when they have assets that are more easily
redeployable. While a liquid asset market allows firms in distress tomore eas
it easier for firms to grow by acquiring

ily dispose of their assets, it also makes
is consistent with
assets. Our finding that clustered firms do more acquisitions
the idea that clusters increase asset liquidity, and our result that firms in clus
channel in
ters maintain more financial slack is consistent with an acquisition
of potential
financial slack to take advantage
which clustered firms maintain
that clusters may offer.
acquisition
opportunities
as a proxy for acquisitions
and other growth op
location
Finally, by using
literature
to
economic
the
contributes
this
also
geography
paper
portunities,
that examines how location influences corporate choices.5 For example, pre
vious studies have shown that firms in urban clusters are more likely to out
(Holmes (1999)), and
(Ono (2003)), to vertically disintegrate
and
Wulf
et
al.
(2009) find that
(1992)).
(Glaeser
Also, Landier, Nair,
divestiture
and
its
labor
firm
the
affects
within
policies,
dispersion
and Uysal
(2008) show that physical proximity
Panchapagesan,
source
to innovate
geographic
and Kedia,
affects the
noncore division
that a conglomerate's
For instance, Lang, Ofek, and Stulz
(1996) document
choice of debt and Lamont
are negatively
(1997) shows
related to the conglomerate's
investments
after the 1986 oil price shock.
reduce their investments
of oil companies
that nonoil subsidiaries
5
have been discussed
to firm location and industrial
Issues relating
by economists
clustering
Thisse
and
and
Venables
See Fujita,
(2002),
since Marshall
(2001),
(1890).
Fujita
Krugman,
and Strange
and Puga
(2004) for recent reviews of this litera
Duranton
(2004), and Rosenthal
ture.

Financial
Opportunities,
and Firm Locations
533
Like our study, these papers provide

ability of firms to complete acquisitions.
evidence that supports the idea that location affects firms' behavior.
The rest of the paper is organized as follows. Section I presents a stylized
model and describes the empirical research motivated by it. Section II describes
the data and considers some descriptive evidence. Sections III and IV present
the main empirical results. Finally, Section V presents our conclusions.
I. Empirical
Research
Design
A. A Simple Model
our empirical tests. The
section presents a simple model that motivates
on the idea that firms may find it useful to have financial slack
they have to compete for acquisitions, which ismore likely to be the case
firms are located in clusters.
model considers two periods, t= 0,1, and two potential acquirers, firms
2. At t= 0 firm i(i = 1, 2) sets its leverage ratio, 0 < dk < 1. At t= 1,with
and engage in
probability y, firms have the opportunity tomake an acquisition
a second-price sealed bid auction for the target. The value created by such an
acquisition
depends on the synergy s, with the target, which is known to the
firm at t= 1 but unknown at t= 0.We assume that synergies are independent
?
>
and uniformly distributed on the interval [s
1/2, s + 1/2], where s
1/2.
This
model
when
when
The
1 and
is based
We make three assumptions

regarding the effects of leverage. First, we as
sume that debt is risk free, which allows us to abstract from wealth
trans
fers between debt-holders
and equity-holders
that can arise in acquisitions.
that leverage reduces the funds that a firm can raise to
Second, we assume
finance an acquisition.
In particular, we assume
that firm i can raise funds
?
up to (v + Si
pdi) to make the acquisition, where v is the value of the target
as a stand-alone
firm, that is, without the synergies, and p < 1/2 measures
the intensity with which debt reduces a firm's ability to raise funds.6 With
this specification, a firm's ability to raise funds increases
in the value of the
in its leverage ratio c?. Further

target with the synergy (v + Si) and decreases
more, for simplicity we focus on the case where s > 1/2 + p, which ensures that
?
Si pdi > 0 for any potential synergy realization and choice of debt. When this
assumption holds, all targets are ultimately acquired.7 Third, we assume that,
its effect on acquisitions,
some benefits, for example,
besides
debt generates
tax benefits, on firm value, xdk.
To solve the model, we proceed by backward

induction and obtain the bidding
= 1 if an
strategy at t
acquisition
opportunity arises. Specifically, when this is
6
This aspect of the model
is related
to Clayton
and Ravid
and Zhdanov
(2002) and Morellec
levered bidders
tend to bid less aggressively.
The assumption
that
(2008), who show that more
that program
is concave
and that its first-order
p < 1/2 ensures
that is,
(2) below
condition,
the global optimum.
(3), characterizes
equation
7
Since the minimum
realization
of the synergy is Si = s ? 1/2 and the maximum
choice of debt
s > 1/2 + p implies Si - pdi > 0 for all Si, a\.
is di ? 1, assuming
the alternative
case,
Considering
?
?
debt can impede acquisitions
where
the realized
when
synergy is small, that is, v
Si
pdi < 0,
the presentation
but does not affect the main
intuitions obtained
from the analysis.
complicates

534
=
true, each firm i bids bi
(for7 = 1,2 and j 96?.
The Journal
ofFinance?
v + Si ? pdi and acquires
the target for bj if bi > bj
?= 0, firm 1 sets its leverage ratio dk taking into account the effect that
leverage will have on its ability to acquire potential targets at t = 1. In partic
ular, firm i solves:
At
max xdi+ yE(v +stdi
bj |bt> &/)Pr(fo;> bj).
?
Since bi = v + Si
pdi, and since firm i takes firm/s
can
be
(1)
expressed as
leverage
(1)
choice as given,
- +
(2)
pd/) cfc/,
ds^
maxxck
+Y
j_ ^^jf
=
s* = min{s +
+
di), s + \} and s** max{sy
di), s
p(dj
\ p(dy
|}.8
the first-order condition that characterizes
the symmetric interior
Computing
solution (i.e., di = dj), we obtain:9
where
4*
=
?2.
yp2
(3)
The following result follows directly from equation

Result
1:
The
(i) acquisition
optimal debt ratio, d\, is lower when:

opportunities
(ii) debt has a more negative

(iii) the non-M&A
(i) acquisition
are more
likely to arise
effect on financing
debt benefits are smaller
In addition, equation
(3) has
debt to its determinants:
Result 2: The
lower when:
(3):
sensitivity
^
acquisitions
negative
are more
implications
likely to arise
effect on financing
< 0);
(i.e.,
> 0).
(i.e.,
of debt to the non-M&A
opportunities
(ii) debt has a more
the following
(i.e.,
about
the sensitivity
debt benefits
(i.e.,
acquisitions
< 0);
(i.e., ^-),
of
is
< 0);
(i.e.,
< 0).
The previous result suggests that the empirical importance of r is reduced

in which debt has greater influence on the ability to fund acqui
in situations
sitions, and when acquisition
opportunities are more likely to arise. Formally:
8
of si and s2,
s* and s** capture
the fact that for certain realizations
The limits of integration
of their differences
in leverage. For example,
firms can be limited because
between
competition
In this
if v = 0, p = 0.25, di = 0.2, and cfe= 0.4, then s* = s +
and s** = max{s2
0.05, s
\}.
\
firm 1 makes
the acquisition
of its
+ 0.05 and hence s** = s
case, if S2 < (s
regardless
\,
\)
= seven for the smallest possible
firm 1 bids
realized
synergy s\
synergy. This occurs because
\,
more than 2, that is, 61 = (s 0.1.
0.05 > b<i = S2
\)
9
?*
t < yp2 leads to (3).
, which under symmetry and assuming
(2): ~ =
Solving
YP*{\-p\a?-dj\)

Financial
Opportunities,
and Firm Locations
535
=
is decreasing
in y and p. Intuitively, while a reduction in the cost
|^|
an
increase in the tax benefits of debt) tends to increase
of financial distress (or
leverage, this effect is weakened when having financial flexibility is important
(for instance, when acquisition
opportunities are more likely to arise).
B. Empirical
Implementation
Following
insights from the literature on economic geography, we conjecture
in
to make acquisitions
clusters have more opportunities
that firms
that are
to
In
terms
of the model, this corresponds to clustered firms
subject
competition.
having a larger y, which can stem from either a larger number of acquisition
or a larger degree of competition for those opportunities. We
opportunities,
start by examining the following hypothesis on the differences
of acquisitions
of firms inside and outside clusters:
Hypothesis
1: Firms
outside
in clusters make more

clusters.
acquisitions
in the number
than firms located
Next, we examine whether

leverage has a negative effect on the ability to
make
and whether
this effect is particularly
acquisitions,
strong for firms
in clusters. Notice, however, that leverage is an endogenous
in our
variable
one
must interpret the empirical relation between leverage
model and hence
firms' acquisition
activity as stemming
age. Formally, this effect is described by the
an acquisition.
In our
probability of making
= y
= 1>
>
Pv(bi
by Pi
bj), where Pr(fy
bj)
and
from exogenous
shocks to lever
partial derivative of debt on the
is given
model, this probability
= -yp,
dk). Hence,
s,-+ p(dj
in y and p. Given our conjecture that y is larger in clusters,

which is decreasing
that is, there are more opportunities
to make acquisitions
that are subject to
2 follows.
competition in clusters, Hypothesis
Hypothesis
2: The negative
effect of leverage
on acquisitions
is stronger
in
clusters.
Our third hypothesis

We start from equation
ters of the model:
considers the effect of a firm's location on its leverage.

(3) and consider two effects of clusters on the parame
I. According
toWilliamson
that firms in clusters have
(1988), we assume
better opportunities
to redeploy their assets, which reduces liquidation
costs and implies an increase in the non-M&A benefits of debt, that is, an
increase in r. Specifically, including this cluster effect with other benefits
and costs of debt financing generates
the following expression for r:
n
n=a
+ fcClusteri +
PjmKi> ^
= 1,.., n determinants
of the non-M&A net benefits
{K-} are the j
of debt (i.e., K- is the value that determinant j takes for firm i),
f$j is the
where

536
The Journal
ofFinance?
coefficient associated with K-, Cluster

is a dummy variable
that takes
a value of one if firm / is located within an
industry cluster, and pc > 0
represents the increase in r for clustered firms.
II. To capture our conjecture that firms in clusters encounter more acquisition
opportunities, we express yt as follows:
Xi =
where
/xc> 0 measures
Substituting
(4) and
^ =
Since Cluster
/x+
(jji+
effect on clusters.
the acquisition
(5) into (3), we obtain
a + pcClusten
is a dummy variable,
the following
Pj
+y
/xc
Clusteri)p2
(5)
ficClusteri,
(/i+
specification:
(6)
/zcCluster\)p2
(6) can be rewritten as:
dk= 0o + <f>c
Clusten + ]TfyK}
]T 0,
j
(1
k){R[ x Cluster^,
(7)
and A.=
Notice that, while a
0O =
<Pc=
0o, 4>j =
fp,
^,
on
net
the
effect
of
clusters
is
the
priori
leverage
ambiguous,
higher likelihood
in clusters /jlc> 0 is a necessary
of acquisitions
condition for firms in clusters
to have lower leverage. This condition, however, is not sufficient since firms in
clusters may choose to have more leverage due to the higher redeployability
of
their assets (i.e., 0C is negative only when \xc>
^).
where
Hypothesis
3: When
the acquisition
effect is sufficiently strong (i.e., /jlc>
firms in clusters will exhibit lower leverage (i.e., 0C < 0).
of leverage
Finally, our fourth and last hypothesis relates to the determinants
inside and outside of clusters. As shown in equation
(7), for each determinant
of leverage
the ratio of the coefficients for firms inside and outside of clus
ifj,
ters is constant and equal to X. Notice that k < 1 (i.e., k = -j?)
captures the
amelioration
Hypothesis
effect described
in Result
2.
4: The ratio of the estimates of the determinants

of leverage for
firms inside versus outside clusters is constant and smaller
than one (i.e., k < 1).
II. Data
and
Sample
Characteristics
We examine firms covered in Compustat

and CRSP from 1990 to 2005. Since
we are interested in firms with a well-defined
location (i.e., firms with a high
assets
at the firm's corporate head
of
their
and
located
percentage
employees
we
our
exclude
from
like hotels and restaurant
industries
quarters),
sample
chains, and concentrate instead on manufacturing

industries are likely to exhibit
manufacturing
firms. Furthermore, because

nation-wide
product market

Financial
Opportunities,
and Firm Locations
537
competition, in the interpretation of our results we abstract from product mar

ket competition effects associated with differences in firms' locations.10
Specifically, we consider firms with primary three-digit SIC between 200 and
399 and firms in SIC 737 (Computer Programming
and Data Processing).11
in
firms
and
Our data set also excludes:
Hawaii
Puerto Rico; (ii) firms
(i)
with sales less than $50 million (in 1990 dollars); and (iii) three-digitSIC
that have less than 10 firms in any of the sample years. The final
21 industries,
16 years, 1,910 firms, and 13,342 firm-year
includes
sample
observations. Approximately
80% of our sample belongs to firms classified in
are
SIC 200-399
and the rest to firms in SIC 737. Variables
(manufacturing)
at the bottom and top 1% to limit the effect of outliers.
windsorized
We focus on the location of firms' headquarters,
that is, the Metropolitan
Statistical Area (MSA) as specified in the 1990 Census. When
the firm's head
are
an
we
not
in
located
consider
of
MSA
the
instead.
location
quarters
county
With this information, for each firm-year, we construct the following four mea
sures of industry clustering based on the geographical
proximity of the firms'
industries
headquarters:
(i) the number
of firms with
the same
three-digit SIC
that are
located in a givenMSA, Number ofFirms; (ii) the number offirmswith the
same three-digit SIC in an MSA divided by the total number of firms with the
same three-digit SIC, Ratio ofFirms; (iii) a dummy variable that takes a value
of one for firm-years in which a firm's headquarters
is located within an MSA
that has both 10 ormore firms with the same three-digit SIC and at least 3% of
the market value of the industry, and zero otherwise, Cluster-Firm;
and (iv) a
a
one
a
variable
that
of
for
takes
value
in
which
firm's
head
dummy
firm-years
that represents at least 10% of the market
quarters is located within an MSA
of the firm's industry and that has at least three firms with the same
To save space, we report the results forNumber
three-digit SIC, Cluster-MV.
and
in
Firms
Firms
Ratio
the Internet Appendix.12
of
of
Notice
that the above measures
define clustering
in absolute
(Number
as
as
Firms
and
well
relative
terms
and
Cluster-Firm)
(Ratio of Firms
of
Cluster-MV).13
Finding whether our results are robust across these different
value
10
This
is consistent
with Glaeser
and Kohlhase
costs
(2004), who report that transportation
is
goods have fallen by over 90% in the last century, and argue that the world
as a place where
better characterized
it is essentially
free to move goods.
11
Most
firms in the Computer
and Data
Programming
Processing
Industry manufac
ture products
a service. Nonetheless,
than provide
rather
our re
Windows)
(e.g., Microsoft
are
sults
to excluding
see the Internet
robust
SIC
737. Please
available
at
Appendix,
for these and other additional
statistics
and
http://www.afajof.org/supplements.asp,
descriptive
in the paper.
results not included
12
While we require that the firm have at least $50 million
in sales to be part of our sample, our
formanufacturing
cluster measures
consider all the firms that are included in Compustat

in a given year even if their
sales are less than $50 million.
13
that Cluster-Firm
takes the value one only when firms in the MSA
Notice, however,
represent
at least 3% of the industry's market
is set to one when
there are at least
value, and Cluster-MV
three firms in the same
the MSA.
These
are included
additional
conditions
to
industry within
the essence
of clustering,
that is, a concentration
of a sufficient number
of firms with
capture
relative
importance
in the industry. Nonetheless,
as discussed
below,
our results

do not depend
on
538
The Journal
ofFinance?
of clustering is particularly
important because
defining a cluster
as an additional robust
empirically can be somewhat subjective. Furthermore,
ness check, we provide an analysis of the software
industry (SIC 737), which
has a large number of firms and a very well-defined
cluster in Silicon Valley.
The Silicon Valley area in our analysis corresponds toMSA code number 7362
as defined by the 1990 Census, which includes San Francisco,
and
Oakland,
San Jose in California. While, strictly speaking, this area is larger than Silicon
code
Valley, for consistency with the rest of the paper we use the whole MSA
as the geographical
location unit.
on Cluster-Firm
Based
and Cluster-MV
there are 1.27 and 1.55 clusters
per industry, respectively. This difference can be explained
by the tendency
of Cluster-Firm
to identify clusters in industries
in which there are a large
number of firms (e.g., SIC 737), and of Cluster-MV
to define clusters around
the largest firmswithin an industry (e.g., SIC 356). There are also differences in
dimensions
clustering across industries. For instance, according to Cluster-Firm, Computer

Related
Services
Industry (SIC 737) has five clusters in 1990, six clusters in
1999, and five clusters in 2005. In contrast, Motor Vehicles and Motor Vehicle
(SIC 371) has just one cluster during our entire sample period.
Equipment
In our sample, the median
number of firms in the same industry within an
is six, and, according to Cluster-Firm
MSA
and Cluster-MV,
41% and 31%
of the observations
to firms located within an industry cluster,
correspond
and Cluster-MV
is 46%.)
respectively. (The correlation between Cluster-Firm
On average, according to Cluster-Firm,
each MSA has 0.14 industry clusters
in the sample), but there is a significant variation across
(there are 190 MSAs
MSAs. For example, New York City hosts six industry clusters in 1990 and five
in 2005. In contrast, Albuquerque
did not have any industry clusters during
our sample period. In general, clusters tend to be located in larger MSAs, which
size in our regressions.14
points to the need to control forMSA
Table I provides descriptive statistics of our sample for a number of variables
of interest. In particular, for each variable, it reports mean, median,
and mean
values for firms inside and outside clusters (based on both
industry-adjusted
on the def
definitions of cluster, that is, Cluster-Firm
and Cluster-MV).
Details
inition and construction of all the variables are reported in the Data Appendix
following the text.
According to these figures, while firms inside and outside clusters have sim
ilar profitability, firms in clusters have lower market
leverage and hold more
cash than firms outside clusters. In addition, firms in clusters do more R&D,
have
fewer tangible assets, and exhibit higher market-to-book

ratios. These
differences remain significant after subtracting the industry means, and hence
they cannot be fully explained
by the fact that industries exhibit different
to cluster. Notice also that after subtracting the industry means,
tendencies
a particular
cluster definition, and are robust to excluding
these additional
conditions
Firm and Cluster-MV.
14
In Table
IA.I in the Internet Appendix,
Panel A reports the per-year
average
clusters by industry and Panel B reports the number
of clusters by MSA.

on Cluster
number
of
o P &>
Of.
o*.o*.
CO OSO
f
of.
Of.
oj.
<?-j
.Of.
OD P
<t>
p,
o op
o*.
Of.
o Co OiCOCD
Median
Mean
Value
Values
Adjusted
Industry
Value
Mean
Sample
Cluster
Cluster
Cluster
Cluster
Cluster
Cluster
Cluster Cluster
Cluster
?-Stat
Cluster
Cluster
?-Stat
Cluster
Sales
5.733
5.740
5.729
6.100
5.586
5.305
5.406
5.685
5.293
0.202
-0.095
3.59
0.393
-0.157
6.14
R&D/TA
0.065
0.099
0.049
0.085
0.057
0.090
0.024
0.032
0.074
0.013
-0.006
6.91
0.012
-0.005
6.05
EBITDA/TA
0.159
0.164
0.157
0.165
0.157
0.156
0.150
0.159
0.151
0.004
-0.002
1.14
0.005
-0.002
1.47
book
Market
2.201
2.782
2.593
1.927
2.067
2.045
to
1.486
0.284
1.549
1.854
0.319
-0.134
-0.127
6.28
6.54
Cluster-Firm
Cluster-MV
Cluster-MV
Summary
Whole
Off
In
firms
10
SIC
with
three-digit
3%
the
and
least
at
or
of
more
same
of
market
industry,
Cluster-MV
The
value
and
variable
otherwise.
zero
the
table
Data
available
Appendix.
^-stat
The
the
^-statistic
difference
are
of
columns
between
the
industry-adjusted
report
value
mean
Table
Ifor
interest.
reports
of
statistics
sample
number
variables
of
For
summary
it
our
each
variable,
amedian
mean
reports
and
values,
firm's
industry
that
and
has
three
with
least
firms
at
the
three-digit
SIC.
Details
definitions
same
the
and
of
variables
construction
reported
onin
firms
for
located
values
in
clusters
mean
definitions
outside
and
two
to
Cluster-Firm
industry
according
clusters
of
cluster:
and
Statisticsindustry-adjusted
Table
I
Cluster-MV.
The
variable
Cluster-Firm
takes
for
avalue
of
one
firm-years
which
in
afirm's
headquarters
is
located
within
an
MSA
that
has
both
takes
firm-years
for
of
firm's
value
that
which
in
awithin
headquarters
one
MSA
located
is
10%
least
the
of
at
market
represents
value
an
Book
leverage
0.497
0.431
0.476
0.454
0.396
0.485
0.467
1.49
0.439
0.004
-0.010
0.006
-0.013
2.17
Market
leverage
0.322
0.242
0.359
0.274
0.340
0.181
0.214
0.316
0.290
-0.028
0.013
4.70
-0.030
0.012
4.59
Age
18.264
15.166
19.725
18.025
18.359
10
12
14
15
-0.783
0.369
1.65
0.299
-0.120
0.56
Capital
exp.
/
TA
0.067
0.070
0.066
0.069
0.049
0.054
0.067
0.053
0.050
0.002
-0.001
1.42
0.001
0.000
0.64 Cash
flow
Std.
Dev.
0.032
0.040
0.028
0.037
0.030
0.032
0.020
0.028
0.022
0.003
-0.001
3.48
0.003
2.95
-0.001
Average
stock
return
0.254
0.318
0.224
0.289
0.240
0.218
0.196
0.144
0.153
0.027
-0.013
3.34
0.022
2.56
-0.009
Tangible
assets/TA
0.227
0.179
0.202
0.250
0.237
0.151
0.170
0.218
0.203
-0.009
0.004
2.52
-0.013
0.005
3.08
Cash/nTA
0.323
0.531
0.225
0.466
0.266
0.312
0.077
0.242
0.101
0.114
-0.054
7.88
0.111
-0.045
7.27
Net
book
leverage
0.285
0.146
0.350
0.203
0.317
0.139
0.396
0.219
0.352
-0.059
0.028
5.85
-0.053
0.021
4.87
Net
market
leverage
0.227
0.115
0.280
0.159
0.255
0.057
0.100
0.251
0.215
-0.042
0.020
6.13
-0.043
0.017
5.74
in
outside
cluster
(standard
and
firm).
by
boldface
Figures
in
indicate
10%
robust-clustered
the
significance
level.
at
errors
are
Dividend
0.340
0.212
0.400
0.315
0.350
0
-0.026
0.012
1.73
0.011
-0.004
0.67
Debt
rating
0.035
0.052
0.026
0.025
0.057
00.018
-0.008
1.95
0.020
-0.008
1.96
Population
15.085
14.707
15.888
15.734
15.899
14.760
14.858
15.767
14.921
Observations
4,272
13,324
9,070
3,810
9,532

540
The Journal
ofFinance?
Table II
Acquisition
II reports
firm mean
values
Table
summary
for firms
cluster:
industry
variables
^-statistic
statistics
located
Cluster-Firm
Activity
on firms'
in clusters
by firm). Figures
Statistics
it reports
activity. For each variable,
clusters according
to two definitions
of
on the definitions
and construction
of the
acquisition
and outside
and Cluster-MV.
in the table are available

reported
of the difference between
the mean
are robust-clustered
Summary
Details
in the Data
The ?-stat columns

Appendix.
report the
in cluster and outside cluster (standard
errors
value
in boldface
indicate
significance
at the 10%
Cluster-Firm
In
Off
Sample
Cluster
Cluster
of acquirers
of firm acquirers
of asset acquirers
0.376
0.430
0.162
0.215
0.293
0.322
of public
of within
0.066
0.096
0.210
Whole
Ratio
Ratio
Ratio
Ratio
Ratio
acquirers
industry
acquirers
level.
Cluster-MV
In
Off
?-Stat
Cluster
Cluster
0.350
5.52
0.434
0.352
5.23
0.137
6.99
0.213
0.142
6.04
0.279
3.24
0.332
0.277
3.85
0.051
6.08
0.099
0.052
5.81
0.268
0.183
6.48
0.250
0.194
4.07
11.30
?-Stat
Ratio of local acquirers

value/TA
Acquisitions
Firm acquisitions
value/TA
0.066
0.129
0.036
12.04
0.134
0.039
0.076
0.100
0.065
5.69
0.091
0.070
3.22
0.046
0.068
0.035
6.71
0.060
0.040
4.06
Asset
0.024
0.024
0.024
0.09
0.023
0.024
0.72
0.023
0.036
0.017
6.09
0.035
0.018
4.92
0.041
0.058
0.033
5.44
0.048
0.038
2.36
0.009
0.018
0.004
9.04
0.018
0.005
8.07
Public
Within
Local
acquisitions
acquisitions
industry
acquisitions
value/TA
value/TA
acq. value/TA
value/TA
clustered firms are larger, have more volatile

to have an investment grade debt rating.
III. Acquisition
Activity
cash flows, and are more
and Firm
likely
Location
This section presents evidence that relates a firm's location to its acquisition
included in the Securities Data
activity. Gur analysis considers all transactions
from 1990 to 2005 that
Database
(SDC) Mergers and Acquisitions
Corporation's
are listed as an "acquisition
or
ofmajority
interest, merger, asset acquisition
in our sam
of certain assets." In total, there are 9,348 acquisitions
acquisition
in 3,659 of these acquisitions

the acquirer is
ple, and according to Cluster-Firm
is $181
located within an industry cluster. The average value per transaction
million.
Table II documents
that, relative to firms located outside clusters, firms in
clusters are 23% more likely to make
acquisitions
(e.g., 0.430 vs. 0.350 for
and 50% more likely to acquire another firm (e.g., 0.215 vs.
Cluster-Firm),
for
0.137 for Cluster-Firm).
These
effects are robust and more pronounced
between firms within the same industry, which is of particular
are likely to be subject to more competition.
interest since these transactions
firms in clusters are 46% more likely
For instance, according to Cluster-Firm,
to make
within their industry and 85% more likely to acquire
acquisitions
another firm with the same three-digit SIC.
transactions

Financial
Opportunities,
and Firm Locations
541
as a
II also shows that the per-year value of a firm's acquisitions
assets
in
total
is
than
of
its
clusters
outside
clusters.
Notice
larger
percentage
is not statistically different, the
that although the volume of asset acquisitions
is 50% larger in clusters (i.e., 6.8% vs. 3.5% for
volume of firm acquisitions
Cluster-Firm
and 6.0% vs. 4.0% for Cluster-MV).
Table III documents that the effect of a firm's location on its acquisition activ
ity remains significant after controlling for year and industry fixed effects (and
industries exhibit a greater ten
hence, for the possibility that more acquisitive
dency to cluster).15 Specifically, being located in a cluster raises the likelihood
ofmaking an acquisition
and by 7.4
by 4.8 percentage points for Cluster-Firm
Table
(an increase of 13% and 20% over the sample

percentage points for Cluster-MV
average, respectively). The effect is robust across all our clustering measures
and tends to be relatively more significant for firm acquisitions,
public acqui
(while, as before, it tends not to be
sitions, and within-industry
acquisitions
For example, firms in clusters (as defined
significant for asset acquisitions).16
are 3.3 percentage points more likely to acquire another pub
by Cluster-Firm)
lic firm, an increase of 50% over the sample average. Finally, Table III also
documents
that in the software industry, firms located in Silicon Valley are
more likely tomake an acquisition
and have a greater volume of transactions
relative to total assets. For instance, firms in Silicon Valley are 12 percentage
an increase of 30%
points more likely to make a within-industry
acquisition,
over the sample average in the software industry.
Overall, Tables II and III provide support forHypothesis
1, which postulates
that firms in clusters are more acquisitive
than firms outside clusters. Our find
is also consistent with existing evidence
ing that clustering spurs acquisitions
that geographic proximity facilitates input sharing (e.g., Holmes
(1999)), labor
market pooling (e.g., Diamond
and Simon (1990), Dumais, Ellison, and Glaeser
(1997), and Costa and Kahn
(2000)), and knowledge
spillovers
(e.g., Jaffe,
and Henderson
and Feldman
(1993) and Audretsch
(1996)).17
Trajtenberg,
Table IV explores the relation between acquisition
activity, leverage, and
clustering. In particular, we investigate whether the negative effect of leverage
on acquisitions
is stronger in clusters, that is, Hypothesis
2. Panel A reports
of a firm's acquisition
slack (Net Mar
regressions
activity on its financial
ket Leverage),
the interaction between financial slack and our cluster proxy
controls for a firm's size (Sales in logs), profitabil
(Cluster-Firm or Cluster-MV),
ity (EBITDA
ITA),
stock return
(Average Stock Return),
growth opportunities
15
The reported
in the even-numbered
columns
of Table
III correspond
to linear
regressions
in the Internet Appendix,
a probit analysis
probability models. As reported
very similar
produces
results.
16
A number of studies raise doubts on the comprehensiveness
and accuracy
of the SDC database,
caveats
that are likely to affect the information on nonpublic
transactions.
See, for instance, Boone
and Mulherin
therein. This
could partially
the relative
(2007) and references
lack of
explain
as well as the stronger evidence
in asset acquisitions
evidence
found in public acquisitions.
17
in clusters also tend to sell more assets, and the effect is relatively
Firms
stronger for within
For instance,
after controlling
for industry
fixed effects and using
the
industry transactions.
Cluster-Firm
are two percentage
definition, firms in clusters
points more
likely to sell assets
to another
firm with
the same
three-digit
SIC,
a 33%
increase
over the sample

average.
alley
to
Asset
Firm
Public
Within
Industry
Acquisitions
All
Acquisitions
Local
Acquisitions
total
assets.
0.102
Reported
are
the
coefficients
Even-numbered
Tobit
Appendix.)
Data
in
the
to
the
correspond
columns
dependent
which
regressions
ratio
is
firm's
variable
of
acquisition
Table
III Activity
Acquisition
Regressions
All
firm).
by
clustered
and
the
fixed
robust
include
Cluster-MV
effects
regressions
Cluster-Firm
and
are
industry
include
year
also
regressions
Silicon
Valley
fixed
(The
effects.
the
that
SIC
study
737.)
software
industry,
Details
definition
regressions
is,
the
and
of
construction
variables
on
and
row
corresponds
to
adifferent
regression.
Odd-numbered
columns
correspond
variable
to
OLS
regressions
indicating
in
an
which
acquisition.
the
dependent
(Several
variable
types
of
is
acquisitions
adummy
considered:
are
Firm,
All,
Asset,
Public,
Within
Industry,
and
Local,
as
denned
in estimated
documents
firm's
III
Table
the
of
effect
location
its
aafter
activity
acquisition
on
for
fixed
industry
controlling
and
Each
effects.
year
numbered
column
0.191
0.108
with
their
^-statistics
in
Cluster-MV
0.018
0.052
0.140
0.063
0.088
0.074
0.235
0.043
0.049
(2)
0.075
0.252
0.088
Observations:
13,342
(3.16)
(3.66)
(4.32)
(0.82)
(4.54)
(1.78)
(4.30)
(4.76)
(3.06)
(3.04)
(11.07)
(10.88)
0.269
R2
0.05
0.04
0.03
0.02
0.05
0.08
(1.74)
(3.66)
(5.36)
(5.74)
(4.52)
(6.10)
(5.40)
(4.07)
(11.41)
(3.46)
(12.67)
Observations:
(4.92)
13,342
R2
0.05
0.03
0.08
0.05 -0.002
R2
0.03
0.04
0.02
0.03
0.06
Cluster-firm
0.123
0.049
0.033
0.009
0.074
0.048
0.026
0.071
0.039
0.197
(1)
0.085
0.249
(0.10)
(0.85)
(5.00)
(3.53)
(4.35)
(4.80)
(3.40)
(4.16)
(3.31)
(6.43)
(3.14)
(7.94)
Observations:
2,631
0.026
boldface
Figures
Appendix.
Data
in
indicate
the
table
reported
the
available
at
10%
significance
level.
are
(5)
(4)
(3)
(2)
(1)
(8)
(7)
(6)
(9)
(11)
(10)
Definitions
Cluster
(12)

parentheses
(standard
0.080
5?
cs
OW
Of.
ok'Ol.
Cft
<x.
O
Of.
oi.
<x.
OK
oo
Ol.
oso CO
CO
(continued)
Within
Industry
All
Public
Acquisitions
Acquisitions
Acq.
Local
(0.80)
(2.87)
(2.70)
(3.05)
(3.03)
(2.29) (3.12)
(2.10)
(1.41)
(2.01)
(1.25)
(1.22)
(1.05)
(1.11) (1.38)
(2.35)
(2.15)
(2.61)
(3.26)
(0.70)
(1.39)
(1.63)
(1.81)
(1.52)
(0.67)
(1.08)
(0.74)
(0.71) (4.62)
(0.01)
(1.07)
(2.34)
(2.98)
(2.13)
(6.95)
(1.68)
(6.79)
(2.46)
(1.21) (0.45)
(3.16)
(3.14)
(2.49)
(2.37)
(2.85)
(0.58)
(2.82)
(0.49)
(2.20)
(2.09)
(0.65)
(0.46)
(0.41)
(0.58)
(0.51)
(0.45)
(0.30)
(0.24)
(4.05)
(4.51)
(5.12)
(0.68)
(1.58)
(0.70)
(1.73)
(0.95)
(3.74)
(3.62)
(1.22)
(0.99)
(1.04)
(1.23)
(1.30)
(1.55)
(3.49)
(3.58)
(1.54)
(1.93)
(2.29)
Age
-0.001
-0.001
0.000
-0.002
0.000
0.000
0.000
-0.001
R2
0.12
0.07
0.08
0.12
0.05
0.06
(13.65)
(12.84)
(13.28)
(13.02)
(11.50)
(11.91)
(9.63)
(9.69)
(4.52)
(3.68)
Sales
0.039
0.080
0.083
0.038
0.057
0.058
0.013
0.022
0.011
EBITDA/TA
0.047
0.019
0.289
0.260
0.050
0.025
0.169
0.161
Population
0.004
0.003
-0.001
0.007
0.000
-0.002
profitability
(Relative
EBITDA/TA)
_(1)_(2)_(3)_(4)_(5)_(6)_(7)_(8)_
Cluster
0.000
0.024
0.031
0.106
0.098
0.041
0.030
0.025
0.034
at
eturn)
Details
t-2,
and
with
average
relative
Table
in
fixed
include
industry
Reported
regressions
the
their
and
^-statistics
effects.
with
coefficients
estimated
parentheses
(standard
in
year
are
3-year IV
different
2SLS
panel)
to
which
the
corresponds
adependent
in
regression
(Several
is
dummy
indicating
variable
of
types
acquisition.
aan
dummy).
and
In
variables
the
Panel
Relative
cluster
in
instrument
regressions
Net
t?
Market
(and
B,
1
Leverage
its
iteration
at
with
the
we
IV
Table
from Table
t?4
to t?6
(as
iterations
between
these Market
variables
documents
IV
effect
the
of
firms'
leverage
firms
for
activity
acquisition
located
on
inside
(in
industry
outside
and
Each
clusters.
column
eachdefinition
the the
t?1
Panel
in
/
Net
instrument
the
its
(and
with
iteration
R&D
regressions
Market
A,
TA
ILeverage
with
at
dummy)
we
cluster
Tangible
and
Assets
to
book
-0.009
-0.004
0.005
0.006
-0.006
-0.004
0.002
0.005
0.007
(EBITDA/TA)
3-year
the
with
and
profitability
t-2,
at
the
(as
stock
and
t-4
t-6
with
average
from
to
iterations
between
these
returns
well
as
with
Activity
Acquisition
Leverage
andthe
on
the
of
variables
reported
Acquisition
A:
Panel
Activity
Market
Net
and
Leverage
as
independent
variables
Net
Market
Leverage,
Market
Net
Relative
Leverage,
Market
to
Book,
EBITDA
ITA,
and
Sales
are
lagged
one
period.
In
the and
the
"Cluster"
variable
independent
columns
Cluster-Firm,
to
the
in
Cluster-MV.
corresponds
and
it
The
columns
to
even-numbered
corresponds
Net
leverage
0.049
0.041
-0.050
-0.043
-0.173
-0.265
-0.074
-0.066
-0.181
-0.218
market in the
All,
Within
Public,
acquisitions
Industry,
&
Industry
considered:
the
Data
defined
Local,
in
and
Appendix.)
are
the
In
odd-numbered
as
well
construction
Net
-0.070
-0.049
-0.125
-0.143
-0.153
-0.146
leverage
-0.108
market
-0.118
-0.183
-0.196
cluster
x
boldface
Figures
indicate
in
10%
the
significance
at
level.

and the cluster

dummy). All
table
are available
in the
0.002
0.003
0.044
Average
0.016
0.031
0.015
stock
return
Industry
Within
(2.74)
0.12
(3.22)
Age
All
Public
Acquisitions
Acq.
Local
Acquisitions
0.11
(0.79)
(1.92)
(1.39)
(2.28)
(1.37)
(1.73)
(2.06)
(2.37)
(8.02)
(7.71)
(2.68)
(1.30)
(1.06)
(0.62)
(2.79)
(2.00)
(1.99)
(1.96)
(1.46)
(1.72)
(1.16)
(0.76)
(1.40)
(1.57)
(1.01)
(0.84)
(0.71)
(0.60)
(1.33)
(1.39)(4.56)
(3.38)
(3.37)
(3.39)
(2.71)
(2.66)
(3.13)
(3.12)
(2.36)(2.40)
(0.82)
(3.18)
(4.59)
(0.50)
(3.01)
(3.47)
(0.11)
(0.96)
(0.24)
(1.52)
(0.77)
(1.23)
(0.93)
(1.06)
(3.31)
(1.59)
(1.37)
(3.78)
(1.92)
(1.64)
(2.38)
(0.66)
(0.56)
(0.40)
(0.60)
(0.43)
(0.27)
(0.51)
(0.35)
(4.08)
(4.20)(2.78)
0.07
0.06
0.1
(13.53)
(12.68)
(13.03)
(12.56)
(11.72)
(11.30)
(9.45)
(4.51)
(9.21)
(3.83)
0.083
Sales
0.039
0.082
0.040
0.060
0.058
0.023
0.022
0.014
-0.001 -0.001
0.000
0.000 -0.002
0.000
0.000
0.000
-0.001
-0.002
EBITDA/TA
0.014
0.270
0.260
0.003
0.005
0.020
0.046
0.142
0.025
0.156
0.004
-0.001
0.003
Population
-0.002
-0.001
0.007 0.12
(2.12)
(3.59)
_(1)_(2)_(3)_(4)_(5)_(6)_(7)_(8)_(9)_(10)
0.013
Cluster
0.023
0.020
0.017
0.025
0.014
0.072
0.073
Market
to
book
-0.007
-0.005
0.005
0.005
-0.005
-0.005
0.002
0.005
0.005
Table IV?Continued
Panel
Activity
Acquisition
Relative
B:
Market
Net
and
Leverage
0.004
0.047
0.017
0.034
0.035
Average
0.017
stock
return
Relative
net
market
leverage
-0.232
-0.116
-0.043
-0.027
-0.191
-0.146
-0.063
0.055
-0.065
0.074
Relative
netmarket
lever,
xcluster -0.167 -0.467-0.364
-0.293 -0.540
-0.181
-0.288
-0.333
-0.520
-0.245

0.
Financial
Opportunities,
and Firm Locations
545
in logs), and
(Market toBook), and age (Age), a control for city size (Population
run
for
We
controls for year and industry fixed effects.
all, public,
regressions
within-industry, and local acquisitions.
that include a measure
of a firm's fi
Panel B reports similar regressions
to
its
and
location
slack relative
nancial
peers (Relative Net Market
industry
measure
and nonclustered
clustered
by demeaning
Leverage). We build this
Net
the
inside
and outside
Market Leverage
firms'
by
industry-year average
us
a relatively
to
test
These
allow
whether
clusters, respectively.
regressions
weak
financial position reduces the acquisition
activity of firms in clusters
vis-a-vis outside clusters (i.e., whether the interaction term is negative).
test whether firms in clusters are more likely to lose
The above regressions
out on acquisitions when they have insufficient financial slack. As our model
to maintain
illustrates, however, firms in clusters will also find it desirable
more financial slack in anticipation
of acquisition
which
opportunities,
implies
to the choice of
that there is a feedback effect from acquisition
opportunities
financial slack. To address this endogeneity concern, we estimate a linear prob
(NetMarket
ability model inwhich we instrument our financial slack variables
and Relative Net Market Leverage). As instruments, we use lagged
Leverage
as
R&D
and asset tangibility (Tangible Assets/TA),
(R&D/TA)
expenditures
well as lagged values of stock returns and profitability. The use of lagged values
of stock returns and profitability is motivated
by recent evidence that shows
that firms are slow to readjust their leverage ratios after experiencing
prof
itability and stock return shocks that move them away from their target debt
ratios. We assume that these variables, sufficiently lagged, do not have a direct
effect on the current probability ofmaking an acquisition.18
Table IV documents
that the acquisition
choices of firms tend to be affected
more negatively by leverage when they are located in clusters. Specifically, the
interaction effect between our cluster proxies (Cluster-Firm and Cluster-MV)
and the financial slack measures
(NetMarket Leverage and Relative Net Market
is always negative and significant in almost all specifications. More
Leverage)
as
our
model predicts, the effect is especially strong for transactions
that
over,
are likely to be subject to more intense competition, that is, within-industry,
These results are consistent with Hypothesis

local, and public acquisitions.
which
that
the
activities of clustered firms are more
2,
postulates
acquisition
affected by leverage.19 In addition, the coefficient on Net Market Leverage and
Relative Net Market Leverage
is always negative
(except in local transactions)
and significant in 11 of the 20 specifications. This negative relation between
18
1 with the 3-year average
and stock
Specifically, we instrument
leverage at t
profitability
returns from t ? 4 to t ? 6. See Baker and Wurgler
that stock
(2002) and Welch
(2004) for evidence
returns have a persistent
effect on capital structure, and Kayhan
and Titman
(2007) for evidence
that
firms revert
relatively
slowly
stock returns.
19
It is also
to their capital
structures
following
shocks
to profitability
and
that the cluster coefficient is positive

in all the specifications,
and it is
noteworthy
on
The evidence
statistically
significant for public, within-industry
public, and local acquisitions.
local acquisitions
should be interpreted with caution, however. Our cluster measures
on
depend
the number
making
of firms located within
a local transaction.
an MSA,
which
also
determines,
by definition,

the likelihood
of
546
The Journal
ofFinance?
is consistent with Harford

(1999), who shows that
leverage and acquisitions
Our
financial slack increases a firm's acquisition
evidence, however,
activity.
suggests that the negative effect of leverage on acquisitions, which is stronger
of acquisitions
that involve
for firms located in clusters, may arise because
competition.20
It should be noted that in regressions reported in the Internet Appendix, we
find that the positive relation between financial slack and acquisition
activity
ac
in Table IV holds for stock-financed as well as cash-financed
documented
a
that
slack
result
firms
financial
This
suggests
provides
strategic
quisitions.
in the bidding process even when it is not used. Alternatively, finan
advantage
cial slack reduces debt overhang-related
problems that may lead more levered
In addition, we find that firms

firms to pass up value-enhancing
acquisitions.
tend to reduce their cash holdings and increase their leverage in the aftermath
as well as cash-financed
which suggests that
of stock-financed
acquisitions,
having a liquid balance sheet might
firm in the postacquisition
period.21
IV. Financial
be important
Structure
and
for integrating
Cluster
the acquired
Location
This section explores the relation between a firm's location and its capital
structure. As we discussed
earlier, location can affect a firm's capital structure
In the first channel, which relates to the argu
choice through two channels.
inWilliamson
ments
(1988) and Shleifer and Vishny (1992), firms will have
if
Hence,
greater debt capacity if their assets are more easily redeployable.
firms in clusters can dispose of their assets more easily, they should also have
higher debt ratios. In the second channel, firms may want to have lower debt
These opportuni
of potential growth opportunities.
ratios to take advantage
in the form ofmore competitive
ties can arise, as we illustrate in our model,
(which are more likely to arise in clusters), or, as we
opportunities
acquisition
In fact,
discuss in Subsection D below, as other types of growth opportunities.
the evidence in Section III, which shows that the negative effect of leverage on
firms' acquisition
strong in clusters, is consistent with
activity is particularly
the presence
A. Leverage
of this acquisition
effect.
Regressions
Table V examines the relation between capital structure and cluster location
iden
of capital structure previously
after controlling for other determinants
in columns (1) through (9) we regress
tified in the literature. In particular,
20
We
variables
(reported in the Internet Appendix)
probit model
perform an instrumental
with Table
Consistent
clusters.
outside
inside
and
into
firms
the
IV, we
sample
split
an acquisition
is
ofmaking
effect of net market
find that the marginal
leverage on the probability
in
clusters.
to
be
tends
and
stronger
negative
21
If
in clusters.
There are also reasons why stock-financed
may be more prevalent
acquisitions
where
also
we
within
instead
leverage
is less asymmetric
likely to be able to use stock
information, firms are more
tend to reduce their need for financial
of payment, which would
the method
activity.
for a given level of acquisition
clusters
of cash
there
as

o0
<;?i OS
Ol
. Ol.Ol.
CO OK
o
f
OK
52
OK
g
Ol.
ok"
ft
3?
oX
Of.
OP OK
o Co Or
3 ?
(4.28)
(5.67)
(2.36)
0.885
0.739
0.828
0.703
k (8.49)
Book
Market
Leverage
Net
Net
Leverage
Market
Lev.
(1)
(2)
(3)
(4)
(5)
(10)
(9)
(8)
(7)
(6)
(11)
(12)
(13)
(2.74)
(2.39)
(3.88)
(2.82)
(3.63)
(2.90)
(2.91)
(2.66)
(17.73)
(17.62)
(8.19)
(12.90)
(12.97)
(4.88)
(16.70)
(17.01)
(13.02)
(13.05)
(4.38)
(0.42)
(10.09)
(10.11)
(3.43)
(11.22)
(11.08)
(4.05)
(9.88)
(10.00)
(10.73)
(11.05)
(1.31)
(0.03)
(18.57)
(18.55)
(12.06)
(8.29)
(12.06)
(3.78)
(17.50)
(18.05)
(11.93)
(11.97)
(2.17)
(2.13)
(4.53)
(2.04)
(2.07)
(5.06)
(5.35)
(3.62)
(4.83)
(4.87)
(5.31)(4.24)
(1.83)
(1.81)
(15.99)
(8.42)
(18.44)
(15.98)
(6.45)
(14.23)
(14.27)
(9.31)
(13.80)
(17.97)
(17.93)
(13.89)
(0.34)
(0.39)
(0.59)
(1.62)
(1.42)
(1.69)
(1.61)
(1.58)
(1.14)
(1.43)
(1.25)
(1.27)
(1.63)(1.28)
(1.58)
(1.45)
(0.73)
(0.77)
(0.12)
(0.03)
(0.83)
(0.78)
(1.18)
(0.17)
(0.08)
(1.92)
(4.75)
(7.56)
(2.58)
(5.14)
(5.06)
(7.45)
(7.15)
(12.65)
(4.69)
(12.64)
(4.48)
(7.64)
(5.01)
R2
0.22
0.21
0.47
0.48
0.41
0.46
0.34
0.48
0.46
0.46
-0.285
-0.295 0.048
-0.512
-0.518
-0.295
-0.717 -0.439
-0.585
-0.546
-0.786
-0.741
-0.701
(3.05)
(2.57)
(3.43)
(3.14)
(4.39)
R&D
/TA
coefficients
^-statistics
their
Leverage
Regressions
Table
V
the
examines
between
relation
structure
capital
location
cluster
after
and
for
determinants
controlling
previously
other
capital
of
structure with
definition
the
of
construction
the
and
table
variables
in
Data
reported
Figures
Appendix.
boldface
available
in
indicate
at
significance
are
V
Table
identified
literature.
Three
in
the
leverage
of
considered:
book,
market
net
leverage.
different
and
market,
Each
measures
are
corresponds
column
ato(13)).
firm.
the
/
k,
For
to
^-statistic
k
reported
test
hypothesis
All
of
fixed
Cluster-MV
1.
include
the
corresponds
effects
and
regressions
year
Cluster-Firm
(The
Silicon
include
fixed
industry
Valley
regressions
also
the
effects.
study
SIC
on
737).
that
industry,
software
regressions
is,
Details
(OLS
(1)
(9)
NLLS
(10)
for
EBITDA/TA,
regression
and
to
columns
Sales,
Market
R&D/TA,
to
Tangible
Book,
R&D
Assets/TA,
and by
in
parentheses
(standard
errors
Sales
0.036
0.014
0.033
0.024
0.023
0.016
EBITDA/TA
-0.439
-0.392
-0.414
-0.340
-0.350
-0.391
-0.279
-0.418
-0.447
-0.364
Market
book
to
-0.007
-0.031
-0.011
-0.029
-0.034
-0.039
-0.016
-0.027
-0.021
-0.007
(1.78)
(3.06)
(2.03)
are
robust-clustered
R&D
dummy
-0.004
-0.005
0.015
0.021
0.020
0.026
0.036
0.025
0.039
0.015
0.017
0.022
0.020
0.006
Population
0.005
0.016
0.003
0.000
-0.001
0.014
0.002
0.010
Observations
13,342
2,631
2,631
13,342
13,342
Average
0.000
-0.009
-0.008
-0.076
-0.093
-0.092
stock
-0.073
-0.072
-0.082
-0.097
-0.103
-0.044
return
-0.075
Cluster-MV
-0.025
-0.036 -0.032
-0.039
-0.019
Tangible
TA
0.083
assets/
0.456
0.073
0.072
0.209
0.210
0.352
0.068
0.499
0.067
0.206
0.207
Cluster-Firm
-0.021
-0.029
-0.060
-0.055
-0.044
Valley
Silicon
-0.056
-0.029
-0.038
level.
the
10%

548
three measures
The Journal
ofFinance?
of leverage (i.e., book, market, and net market leverage) on the

of clustering; (ii) firm size (Sales in logs); (iii)
(i) a measure
following variables:
profitability(EBITDAJTA); (iv)Market toBook, (v) asset tangibility(Tangible
(vi) R&D expenses

(vii) the firm's average stock returns
Assets/TA);
(R&D/TA);
in the last 3 years (Average Stock Return);
(viii) a control for the size of the
in logs); and (ix) industry and
in which the firm is located (Population
MSA
run
for Cluster-Firm,
fixed
effects.
We
Cluster-MV,
year
separate regressions
Firms
and Ratio of Firms, which
and Silicon Valley (as well as forNumber
of
are reported in the Internet Appendix).

to Book, Tangible Assets/TA,
Market
In all regressions, Sales, EBITDA/TA,

are lagged for one fiscal
and R&D/TA
year.22
The results in Table V show that after controlling for other factors previously
of leverage, firms in clusters have lower debt ratios
identified as determinants
than firms outside clusters. The effect is both statistically and economically
leverage and
significant. For instance, firms located in clusters exhibit market
are
4.4
and
3.6
ratios
net market
that
points smaller
percentage
leverage
and
than those of firms located outside clusters (according to Cluster-Firm
our
in
net
the
market
Since
average
Cluster-MV, respectively).
leverage
sample
and 16% (for

is 22.7%, this represents a reduction of 19% (for Cluster-Firm)
are
robust across
in
firm
the
The
results
the
from
Cluster-MV)
average
sample.
of clustering and leverage, and the coefficients on other
different measures
of leverage previously identified are all significant and have the
determinants
expected sign. In relative terms, the cluster effect (i.e., 4.4 and 3.6 percentage
of
deviation change in other determinants
points) is similar to a one-standard
a
in
deviation
For
one-standard
Sales, EBITDA/TA,
instance,
change
leverage.
toBook, respectively, produces a change in net market
and Market
leverage of
4.4
and
3.5, 4.8,
percentage points.23
can help us interpret the negative relation between debt
These regressions
in the previous section. Such a negative
documented
ratios and acquisitions
financial
firms with more opportunities maintain
relation could be because
as
or
our
we
as
Jensen
in
illustrate
(1986),
by
because,
model,
suggested
slack,
when
to
these
it
find
easier
they
opportunities
may simply
managers
exploit
to the extent that a cluster location is associated
have financial slack. However,
one can interpret our results as
and growth opportunities,
with acquisition
lower debt ratios.
indicating that firms with greater opportunities maintain
Notice that this interpretation relies on the exogeneity of a firm's location, an
issue that we address in Subsection C below.
22
We
also
observations
to Rajan
include
in which
of one for firm-year

that takes a value
Dummy,
is similar
are not reported. Notice
that our specification
except that we also include a proxy for clustering and three additional
In controlling
for past stock returns we
Stock Return.
and Average
a dummy variable,
R&D
expenditures
R&D
and Zingales's
(1995)
controls: R&D/TA,
Population,
follow Welch
(2004), who shows
of
that a firm's past stock return can be an important determinant
Firm
and
we
and
Sales
include
I
ratio. In separate
its leverage
Age
Selling
Expenses
regressions,
identical results.
get almost
23
are less likely to issue equity.
and Schultz
(2007) find that firms in rural areas
Loughran
that there is a relatively weak but positive
Our proxy forMSA
shows, however,
size, Population,
the size of the urban area and debt ratios.
relation between

Financial
Opportunities,
and Firm Locations
549
to the leverage model pro

V also reports regressions
corresponding
a
in
constant X that multiplies
These
estimate
(7).
posed
equation
regressions
the estimates of the determinants
of leverage inside and outside of industry
4 from Section
clusters. Our hypothesis
II) is that there is an
(Hypothesis
amelioration
effect in clusters (i.e., X < 1), which means
that when the estima
tion does not take into account the additional
importance of having financial
Table
in clusters, the determinants

of capital structure may appear to be
in
less
clusters.
important
empirically
Specifically, columns (10) through (13)
in Table V report the estimation of equation (7), where ck corresponds to each of
the measures
of leverage and K- are the above-described
control variables
(i.e.,
(i) through (ix)). (Notice that if X = 1 is imposed, this nonlinear
specification
to that reported in columns (1) through (9).)
would be equivalent
Table V documents
this amelioration
effect in the market
leverage regres
is
with
which
consistent
4. For instance, according to Cluster
sions,
Hypothesis
of net market leverage is reduced by 26.1%
Firm, the effect of the determinants
in clusters, that is, X = 0.739. In addition to the amelioration
effect, this second
set of regressions also confirms the negative effect of cluster on leverage (i.e.,
in all four regressions
the cluster proxy is negatively related to firm leverage
and is significant).
flexibility
B.
Cash Regressions
A comparison of the leverage and the net leverage regressions

indicates that
firms in clusters vis-a-vis outside clusters tend to hold more cash. In this sec
tion, we explore the relation between firm location and cash holdings inmore
detail. Similar to our analysis of location and leverage, we estimate two types
of regressions. First, we estimate OLS regressions
that examine how location
affects a firm's cash holdings after controlling for the usual determinants
of
securities to
Specifically, we regress the ratio of cash and marketable
total assets minus cash, Cash/nTA, and its logarithm, Log(Cash/nTA),
on our
measures
of clustering (Cluster-Firm, Cluster-MV, and Silicon Valley) and the
to
(in logs, a control for firm size); (ii) Market
following controls:24 (i) Sales
Book (a proxy for investment opportunities);
for
(iii) R&D/TA
(a proxy
expected
costs of financial distress);
(iv) Capital Exp/TA
(a proxy for firms' investment
a dummy that takes a value of one if the firm has
(v) Debt Rating,
needs);
long-term debt rated by S&P and zero otherwise (a proxy for the costs of ac
a dummy that takes a value of one
(vi) Dividend,
cessing financial markets);
if the firm pays dividends
in that year and zero otherwise (to account for the
ability to raise funds by reducing dividends);
(vii) Cash Flow Std. Dev. (a mea
sure of cash flow volatility);
the firm's average
(viii) Average Stock Return,
stock returns in the last 3 years; (ix) Population
(in logs, a control for the
cash.
cash variables,
are constructed
and \og(CashInTA),
Cash/nTA
by subtracting
from total assets.
This
is for consistency
with the literature,
for example,
Foley
are not subtracted
(2007). We obtain identical results when cash balances
from total assets.
24Both
balances

cash
et al.
550
The Journal
ofFinance?
in which the firm is located); and (x) industry and year fixed
size of the MSA
effects.25
The regressions reported in Table VI, columns (1) through (6), indicate that
of
after controlling for other variables
identified as determinants
previously
is 13.9 and 10.7 percentage points higher for firms
cash holdings, Cash/nTA
in clusters according to Cluster-Firm
and Cluster-MV, respectively. Since firms
in the sample have, on average, 32.3% Cash/nTA,
the cluster effect represents
an increase of 43% for Cluster-Firm

from the aver
and 33% for Cluster-MV
age cash holdings. The effect is statistically significant, and robust across the
of clustering and cash balances,
different measures
including the analysis for
de
Silicon Valley in SIC 737. Among the controls, Sales and Capital Exp/TA
crease cash holdings while Market
toBook, R&D/TA,
Cash Flow Std. Dev, and
Average Stock Return increase cash balances. With respect to these controls,
to a
is equivalent
the cluster effect (13.9 percentage
points for Cluster-Firm)
a
deviation
three-standard
deviation
two-standard
change
change in Sales,
a one-standard
to Book and
in Capital Exp/TA,
deviation
change inMarket
and a six-standard deviation change inAverage Stock Return.
R&D/TA,
We also estimate a nonlinear model similar to the one proposed by (7) and
estimated
in Table V:
x
Cluster + ]P fyK}
log (Cash/nTA)i= 0O+ <t>c
]T <pj; (1 X)(K( Cluster^,
j
(8)
j
control variables
where K? are the above-described
(i.e., (i) through (x)). As
the
Table
estimate of X allows us
from
in the NLLS
V,
leverage regressions
es
effect (i.e., X < 1). The NLLS
to test for the presence of the amelioration
are
in
columns
confirm
and
which
timations of equation
(7)
(9),
(8),
reported
that firms in clusters hold more cash. In addition, according to Cluster-Firm,
of cash
effect in the determinants
there is evidence of a significant amelioration
is
which
the
amelioration
in
clusters.
effect,
statistically
Specifically,
holdings
= 0.847) in
significant at the 1% level, represents a reduction of 15.3% (i.e., X
of cash holdings in clusters. (The estimated
the coefficients of the determinants
is 6.5%, i.e., X = 0.935, but in this case it is
effect for Cluster-MV
amelioration
not statistically significant.) Overall, the findings in this section are consistent
with the previous results that indicate that firms in clusters maintain more
financial slack.
C. The Endogeneity
of Location
Our results up to this point can be summarized as follows: Firms in clusters (i)
make more acquisitions;
(ii) have acquisition activities that are more negatively
25Controls
(i) through (vii) are those considered inFoley et al. (2007) and, as in theiranalysis,
we set R&D
to zero if
equal
year. As in the leverage
regressions,
R&D
for these observations,
reported and we include a dummy variable
Servaes
and
et
al.
See
Almeida,
(2003),
Acharya,
Dittmar,
Mahrt-Smith,
(1999),
Opler
Dummy.
and Maxwell
and Campello
(2008) for other papers that examine firms'
(2007), and Harford, Mansi,
to hold cash.
decisions
they are
the R&D
lagged
value
for one fiscal
is not

Financial
and Firm Locations
Opportunities,
551
Table VI
Cash
Regressions
for
and cluster location after controlling
holdings
of capital structure previously
identified in the literature. Two measures
of cash
are considered:
Each
to a different
and Log(Cash/nTA).
column corresponds
Cash/nTA
holdings
toBook, R&D/TA,
for (7) and (8)). Sales, Market
(OLS for columns
(1) to (6) and NLLS
regression
are lagged one period. Reported
are the
R&D
ITA, and Dividend
Dummy,
Capital
Expenditures
errors are robust
in parentheses
clustered
estimated
coefficients with their ^-statistics
(standard
Table
VI
examines
the relation
cash
between
other determinants
to the test of the hypothesis

A ^ 1.
^-statistic corresponds
by firm). For A the reported
include year fixed effects and the Cluster-MV
and Cluster-Firm
also
regressions
regressions
include
regressions
industry fixed effects. (The Silicon
study the software
Valley
industry, that
on the definition and construction
of the variables
in the table are
is, SIC 737.) Details
reported
clustered
All
in the Data
available
Appendix.
in boldface
Figures
indicate
significance
Cash/nTA
(1)
(2)
Cluster-Firm
Cluster-MV
Silicon
R&D/TA
dummy
Capital
Debt
Exp./TA
rating
Dividend
Cash
Average
stock return
Population
Observations
R2
(5)
(6)
(7)
(8)
0.395 0.634
(7.05)
(6.47) (4.83)
0.243
(5.54)
(4.02) (2.77)
0.352
0.246
0.500
-0.046
(8.28)
0.079
(12.71)
1.378
(10.02)
(8.33)
0.080
(12.68)
1.430
(10.40)
-0.012
-0.009
(0.69)
-0.783
(8.08)
-0.097
(2.85)
0.006
flow Std. Dev.
(4)
(4.31)
-0.046
Market to book
R&D
0.139
Valley
Sales
level.
Log (Cash/nTA)
(3)
0.107
at the 10%
(0.54)
-0.783
(8.03)
-0.087
(2.54)
-0.001
(0.36)
(0.06)
-0.062
(4.92)
-0.073
-0.072
(2.99)
0.072
(6.64)
1.342
(5.69)
(3.29)
0.218
(16.13)
4.952
(12.54)
(3.22)
0.220
(16.30)
5.133
(12.83)
0.004
-0.243
-0.237
(0.10)
-0.555
(2.49)
-0.008
(0.09)
-0.039
(0.74)
(2.51)
-1.565
(2.44)
-1.567
-0.145
(3.01)
0.164
(7.32)
4.418
(6.24)
-0.144
(0.86)
-1.271
-0.077
-0.073
(3.24)
0.240
(13.98)
5.304
(11.73)
(3.20)
0.228
(15.31)
5.213
(12.52)
-0.233
(2.32)
-1.672
-0.236
(2.39)
-1.603
(4.21)
(4.19)
(1.61)
(4.21)
0.008
0.032
0.508
0.030
0.046
(0.04)
(0.17)
(1.48)
(0.14)
(0.23)
0.019
(0.27)
-0.001
(0.01)
-0.267
(1.67)
(4.17)
0.040
0.007
(0.53)
(0.10)
0.665
0.676
2.431
2.522
0.129
2.689
2.661
(1.81)
(1.82)
(1.46)
(2.54)
(2.62)
(0.08)
0.051
(2.62)
(2.71)
0.052
0.067
0.257
0.260
0.159
0.273
0.263
(3.89)
0.008
(1.92)
(3.96)
0.012
(2.62)
(2.18)
0.031
(2.05)
(6.87)
0.055
(2.11)
(6.89)
0.073
(2.81)
(2.27)
0.109
(2.02)
(6.74)
0.057
(2.18)
(6.80)
0.072
(2.77)
(2.66)
(1.13)
13,277
0.43
13,277
0.43
13,342
0.38
13,342
0.37
-0.852
2,631
0.28
13,277
0.43
13,277
0.42
2,627
0.33
A 0.847
0.935
affected by leverage;
slack (i.e., less leverage and
(iii) have more financial
more cash); and (iv) are less sensitive to the usual determinants
of financial
slack. These findings reject the null hypothesis
that a firm's corporate finance
decisions are independent
of location and, to the extent that location choices
are exogenous with respect to the firm's capital structure
choice, support the

552
The Journal
of Finance?
financial slack when they anticipate acquisition

hypothesis that firmsmaintain
opportunities.
A potential concern is that firmswith better growth and acquisition
opportu
nities as well as more financial slack choose to locate in clusters. For instance,
de Motta, and Titman (2007) show that clusters are likely to attract
Almazan,
firms with attributes
that make
them more likely to succeed. This cluster
can
selection effect
potentially be a serious issue for young firms that have
to the extent that unobserved

char
recently chosen their locations. However,
acteristics
that may influence a firm's location choice become less important
over time, the observed effect on capital structures of older firms that chose
locations many years ago is unlikely to arise because
of a cluster-selection
ef
to
For
this
it
is
whether
the relation between
fect.26
reason,
interesting
explore
capital structure and location for older firms is indeed consistent with what we
observe for the entire sample.

In Table VII, we present regressions
that replicate our previous analysis
a
on
but
sample of firms that have been public for at least 10 years. As was
case
in the full sample, Panel A documents
that firms in clusters make
the
more acquisitions
B
and Panel
shows that leverage reduces the tendency to
more
in
that older
make
clusters. Finally, Panel C documents
acquisitions
than older
firms in clusters have lower net leverage and larger cash balances
to Cluster-Firm,
older firms
firms outside clusters. For instance, according
in
net
that are 3.6 percentage
market
ratios
located
clusters exhibit
leverage
points smaller than those of older firms located outside clusters (as reported in
the
Table V, the effect for the whole sample is 4.4 percentage points). Overall,
entire
the
older
firms
and
sample suggests
consistency of the effects between
that the results are not likely to be due to better quality firms locating in
clusters.
D.
Location,
Growth Opportunities,
and Financial
Slack
opportunities
Up to this point our focus has been on the greater acquisition
for financial slack.
that clusters offer, and how this influences the demand
Our focus on clusters is motivated
by the economic geography literature that
more available
to firms that are located
be
that
suggests
opportunities may
close to their industry peers, for instance, due to the importance of input sharing
is motivated
and resource pooling, while our focus on acquisitions
by data
Since acquisitions must be reported publicly, they provide an
considerations.
observable
example of a growth opportunity that may influence a firm's desire
to hold
financial slack.
in a va
In reality, however, a firm's location can influence its opportunities
in
innovate
to
and
it
easier
find
grow
riety of ways. For example, firms may
if
main
firms
innovation.
Furthermore,
growth and
regions with widespread
then in addition
of growth opportunities,
tain financial slack in anticipation
26
Pirinsky
pustat moved
and Wang
(2006)
their headquarters
document
that from 1992
from one MSA
to another
to 1997
less than 2.4%
(118 out of 5,000

of firms
firms did so).
in Com
Financial
Opportunities,
553
and Firm Locations
Table VII
Firm Regressions
Older
Table
VII
In Panel
presents
A
(which
on a sample of firms that have

to Table
III), each numbered
regressions
is equivalent
to OLS
in Panel A correspond
(Several
types of acquisitions
indicating an acquisition.
as defined in the Data Appendix).
Even
Industry, and Local,
in which
to Tobit regressions
the dependent
variable
correspond
Odd-numbered
regression.
is a dummy
the dependent
variable
are considered: All, Public, Within
different
in Panel
columns
numbered
for at least 10 years.

row corresponds
to a
in
which
regressions
been public
column and
columns
variable
In
of the firm's acquisition
volume during the year divided by the firm's total assets.
to a different 2SLS
to Table
Panel B (which is equivalent
IV), each column corresponds
regression
an acquisition.
in which
is a dummy variable
the dependent
variable
(Several
types
indicating
as defined
are considered:
and Local,
in the Data
of acquisitions
All, Public, Within
Industry,
is the ratio
in Table
include the same controls as the regressions
IV,
as well as
Stock Return, Age, and Population,
Sales, Average
Net Market
for the odd- and even-numbered
and Relative Net Market
columns,
Leverage
Leverage
IV. In Panel C (which
for net leverage as in Table
respectively. We also use the same instruments
to Tables V and VI), each column corresponds
to a different OLS
is equivalent
The
regression.
All
Appendix.)
that is,Market
in Panel
regressions
toBook, EBITDA/TA,
in Panel C) include the same controls as in Table V, and

(first four columns
leverage regressions
in Panel
the cash regressions
the same controls as in Table VI.
C) include
(last four columns
are the estimated
All regressions
in Table VII
include year and industry fixed effects. Reported
errors are robust-clustered
in parentheses
coefficients with their ^-statistics
(standard
by firm).
Details
the Data
on the definition
Appendix.
and
Figures
construction
in boldface
Panel
of the variables
indicate
significance
A: Acquisition
in the table
reported
at the 10% level.
(1) Cluster-Firm
Observations: 8,415
Within
Acquisitions
(3)
(4)
(5)
(6)
(7)
(8)
0.048
(2.27)
0.062
(2.61)
0.032
(2.93)
0.141
(3.21)
0.055
(3.20)
0.082
(3.09)
0.090
(9.07)
0.249
(9.88)
0.094
(3.81)
0.088
(8.79)
0.243
(8.83)
0.03
0.098
(4.15)
0.080
0.05
0.048
(4.53)
0.214
(5.34)
R2_O05_O04_O08_O06_
Panel B: Acquisition
Activity
-0.02
leverage
(0.62)
net market
x cluster-firm
leverage
Observations
Local
Acquisitions
0.031
0.016
0.034
0.034
0.121
0.088
(1.74)
(1.36)
(1.26)
(1.83)
(6.52)
(7.47)
8,245
0.07
8,245
0.05
-0.157
-0.129-0.29
(2.13)
-0.04
8,245
0.13
(1.08)
(3.52)
-0.207
(0.19)
8,245
R2 0.13
Industry
Acquisitions
0.002
(0.24)
Relative
Within
Acquisitions
(0.10)
0.035
clusterfirm
0.061
(3.92)
and Leverage
Public
All Acquisitions
Net market
Local
Acquisitions
(2)
0.087
(4.23)
Cluster-Firm
Industry
Acquisitions
(1)
0.05R2
(2) Cluster-MV
Observations: 8,415
in
Activity
Public
All Acquisitions
are available
(1.74)
8,245
0.08
8,245
0.08
-0.264
-0.448
(1.40)
8,245
0.13
(3.28)
8,245
0.12
(continued)

554
The Journal
Table
Panel
ofFinance?
VII?Continued
C: Leverage
and Cash
Regressions
Net Market
Market Leverage
Cluster-firm
-0.015
Leverage
-0.036
(1.55)
Cluster-MV
Observations
R2
8,415
0.48
8,415
0.48
(4.66)
(4.29)
0.077
0.192
(3.45) (2.35)
8,415
0.36
8,415
0.36
-0.031
(2.45)
8,415
0.44
Log (Cash/nTA)
0.111
0.354
(2.70)
-0.017
(1.62)
Cash/nTA
8,415
0.44
8,377
0.38
8,377
0.38
to the cluster effect, other geographical

characteristics
that may also be re
lated to future opportunities may also influence debt ratios and cash holdings.
To test this hypothesis, we consider the following four characteristics:
(i) the
MSA growth rate (Population Growth); (ii) R&D expenditures within the MSA,
which we measure
to the firms'
by the ratio of the aggregate R&D expenditures
of
(MSA R&D/MSA
aggregate total assets in the MSA
TA); (iii) acquisitiveness
firms within the MSA, which we measure
by the ratio of the aggregate dollar
volume of acquisitions
to the firms' aggregate total assets
by firms in the MSA
in the MSA
(MSA Acquisitions/MSA
TA); and (iv) the average stock return of
firms within the MSA
(MSA Stock Returns).
Table VIII documents a significant relation between these regional charac
teristics and firms' capital structure choices. Specifically, firms in high R&D
as well as firms inMSAs with greater acquisition
and growing MSAs,
activity
and stock returns, have lower leverage and hold more cash. Furthermore,
after
the effect of clusters on financial
controlling for these regional characteristics,
which implies that
slack continues to be significant and of similar magnitude,
in previous regressions
is not attributable
to
the cluster effect documented
other characteristics
ofMSAs
that happen to host industry clusters.27
the effect of these characteristics
Documenting
provides further evidence
that growth opportunities affect firms' financing choices. The current literature
an effect running from financial
on capital structure documents
choices to
investment choices (e.g., Lang, Ofek, and Stulz (1996) and Lamont
(1997)).
In contrast, to the extent that regional growth effects are related to a firm's
but are exogenous with respect to the firm's financial
growth opportunities
an effect running from financial choices to investment
VIII
shows
choice, Table
choices.
cluster effect
Table VIII also tests for the possibility that the documented
is stronger in those MSAs with a favorable growth environment. Specifically,
in columns (3) and (4) include an interaction term between
the regressions
27
in the net market

and Cluster-MV
the coefficients on Cluster-Firm
For example,
TA as a control (columns
of Panel A that include MSA
Acquisitions/MSA
regressions
are -0.038
and -0.031,
TA heading)
(2) under the MSA
respectively,
Acquisitions/MSA
corresponding
coefficients
in Table
V are ?0.044
and ?0.036.

leverage
(1) and
and
the
O <?iCOok
OK
ol
.
Ol.o*.Ol
ol CO OKof
OK
Ol.Ol.
OK
oX a
Oi.
o Co CnOiOi
o p OK
(continued)
.14)
(1.83) (4.14)
(4.10) (4.03)
(3.41) (4.39)
(3.08) (3.36)
(4.08)
(1.84)
(3.88)
(4.85) (2.06)
(1)
(2)
(3)(4)
(1)
(2)(1)
(2)
(4)(3)
(3)
(4)
(1)
(2)(3)
(4)
R2 0.46
0.46 Dividend, 0.46 Cash
0.46
0.46 -0.021
0.46
0.46
0.46-0.028
Dummy,
Debt
Rating,
Flow
Average
Stock
Return,
and
Population.
All 0.46
regr
Cluster
-0.038
-0.031
-0.031
-0.042
-0.034
-0.043 -0.049
-0.041
-0.045
-0.032
-0.035
-0.011
-0.013
Deviation,
activity
(1.82)
(2.45)
(0.14)
(0.73)
(1.48)
0.46 the
D/TA, R&D
Dummy,
AverageReported
Stock
Regressions
in
Panel
B include
same
controls (stan
as
A
include
in
Regressions
heading.
R&D
TA
MSA
the
according
Ito
MSA
corresponding
Panel
the
controls
in
regressions
leverage
column
as
same
dustry
fixed
are
the
with -0.026
their
^-statistics
in parentheses
eristics
and effects.
structure
choices.
Four regional
characteristics
are
considered:
(i)
(1.80)
(3.33)
(1.11)
Population.
Std.
TA);
and
(iu)
the
average
stock
return
of
firms
within
the
Stock
Returns).
(MSA
MSA
Each
column
corresponds
to
a
different
OLS
regression.
In
coefficients
capital
Panel
A:
Net
Regressions
Market
to
the
firms'
aggregate
total
assets
in
the
MSA
(MSA
R&D
IMSA
(Hi)
TA);
acquisitiveness
of
firms
within
the
MSA,
which
we
measure
by
the
and
to
save
space
these
controls
are
reported
Internet
Appendix).
That
is,
each
regression
in
Panel
B
incl
Controls
Leverage
Return,
estimated
the
areodd-numbered
reported
in the
Internet
is,
each
regression
in
Panel13,079
Ainincludes
Sales,12,703
EBITDA
I 13,1
TA
Observations
13,342
13,342
13,342
13,342
13,079
13,079
12,073
12,703
12,703
MSA
Acquisitions/
MSA That
TA and
_MSA
Stock
_Population
Growth_
_MSA
R&D/MSA
VIII
firms'
the
columns
the
independent
variable
"Cluster"
to
Cluster-Firm,
intheeven-numbered
columns
it corresponds
to
the
by
firms
firms'
the
in
aggregate
total
assets
the
MSA
(MSA
Acquisit
MSA-Specific
Cluster
xregional
-0.286
-0.396
-0.039
-0.382
13,079
-0.896
-1.597
-1.691
Details
on the definition
construction
reported
in the
table
are
available
in the
Regional
-0.576
-0.608
-0.451
-0.103
-0.114
-0.100
-0.837
-0.750
-0.768
-0.581
-1.237
-1.413
-0.67
-0.616
penditures
MSA, the and
which
in
we activity
measure
by-0.444
the
ratio
of
the
aggregate
R&D
exp
corresponds
variables
the
-0.105 0.005
"Regional
Activity"
MSA
Acquisitions
IMSA TA, MSA Stock
Returns,
Population
Growth,
or
Appendix).
to
MSA
of
Table
Returns_
within
corresponds
boldface
in
indicate
the
significance
10%
level.
at

OlOl
P 51o
(3.37)
(4.14)
(1.27)
(2.29)
(3.27)
(3.91)
(1.99)
(2.29)
(0.90)
(1.39)
(1.51)
(1.18)
(4.91)
'(5.81)
(1.83)
(2.00)
(6.09)
(3.70)
(4.47)
(2.56)
(6.28)
(3.95)
(3.78)
(1.25)
(6.70)
(4.20)
(6.38)
(4.51)
(2.39)
(4.29)
(0.28)
(0.34)
(1)(2)(3)(4) (1)(2)(3) (4)
(1) (2)
(3) (4) (1)(2)
(3)
(4)
Cluster
0.375
0.224
0.312
0.180
0.384
0.239
0.303
0.105
0.414
0.261
0.455
0.314
0.284
-0.029
0.151
-0.023
(Cash/nTA)
Panel
Log
B:
Regressions
VIII?Continued
Table
Acquisitions/
MSA
Stock
TA
R&D/MSA
_MSA
Returns_
TA_
_Population
Growth_
R2
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.43
0.44
0.44
0.44
activity
(2.29)
(1.63)
(1.74)
(1.27)
(2.75)
(1.48)
(3.65)
(5.20)
Observations
13,277
13,021
12,640
13,068
13,068
Cluster
x
regional
2.315
1.694
0.372
0.616
-4.127
-5.616
21.064
20.460
Regional
2.031
1.014
2.503
0.584
activity
1.796
0.707
3.912
0.492
3.612
4.658
2.547
14.614
16.951
0.443
7.132
7.329

Financial
Opportunities,
and Firm Locations
557
the cluster proxy and the regional characteristics.

As shown in the columns
TA heading, the coefficients on Cluster, MSA
under theMSA Acquisitions/MSA
TA (i.e., the
IMSA TA, and Cluster x MSA Acquisitions
I MSA
Acquisitions
interaction term) are negative and statistically
in
the
net market
significant
leverage regressions of Panel A, and positive and also statistically significant
in the cash regressions of Panel B. These results confirm that firms located in
clusters and in acquisitive MSAs
have less leverage and hold more cash, and
on firms' leverage and
they also document that the effect ofMSA acquisitiveness
cash holdings is particularly
strong in clusters.28 In addition, we find that the
effectofMSA StockReturns andMSA R&D MSA

TA on firms'cash holdings is
I
stronger in clusters. (For net market leverage, only the effectMSA R&D IMSA
TA is significantly stronger in clusters). While
the effect ofPopulation
Growth
is not statistically different inside and outside clusters, overall the results in
Table VIII provide evidence that the cluster effect is indeed stronger in those
MSAs
that have a favorable growth environment.
V.
Concluding
Remarks
A growing economic geography literature describes how a firm's location can

be related to a number of its choices. This paper contributes to that literature
that firms that are located in industry clusters are involved in
by documenting
more acquisitions
and maintain more financial slack than their industry peers
our main focus is on industry
that are located away from clusters. Although
such
clusters, like Silicon Valley, we also consider other urban characteristics,
as the size of the metropolitan
area, the rate of growth of the metropolitan
area,
and the R&D
area. In this regard, we find that,
intensity of the metropolitan
ceteris paribus, firms in high-tech cities and growing cities tend to maintain
more financial slack.
This paper contributes to the corporate finance literature that examines the
determinants
of corporate debt ratios and cash holdings. Up to now, the focus
of this literature has been on the characteristics
of firms, and the extent to
which these characteristics

correlate with how they are financed. In this paper,
we show that firms' locations are also related to their
capital structure choices,
and we argue that firms in locations that facilitate investment opportunities
maintain more financial slack.
As we discussed
in the introduction, although the negative relation between
and debt ratios has been previously established,
the direction of
acquisitions
causation
between opportunities
and financial
slack has not been fully re
solved. Given the arguments
in Jensen (1986) and others, it is plausible
that
this association
arises because firms exploit opportunities when
they have fi
nancial
slack rather than maintaining
financial
slack when they anticipate
28
This
is also
evidence, which directly

consistent with the evidence
the negative
clusters).
effect of leverage
links the lower
in cluster to a higher acquisition

leverage
rate,
in Table
IV (i.e., with the regressions
that show that
provided
on the probability
an acquisition
ofmaking
is particularly
strong in

558
The Journal
ofFinance?
cluster and city growth effects are likely to be

and other opportunities, but can be viewed as
firm's capital structure choice, the observed re
financial slack in this study is likely to arise
from the effect that the presence of potential opportunities produces on a firm's
financial slack.
desire tomaintain
The findings in this paper, which indicate a link between a firm's location
and its growth opportunities,
suggest that itmay be fruitful to examine how
since
opportunities. However,
to
related
directly
acquisitions
exogenous with respect to the
lation between geography and
geography affects other corporate finance choices. Recent research by Kedia

on the compensation
and Rajgopal
(2009) explores the effects of geography
our cluster and MSA
characteristics
of both workers and executives. Perhaps
can be used to extend this research to better understand why the use of stock
Similarly, it would be interesting to explore how
options differs across MSAs.
influence governance and the ownership structure offirms.
MSA characteristics
These and other related research challenges are left for future work.
Data
Appendix
listed in the SDC-M&A

refers to all the transactions
(All) Acquisitions
as an acquisition
of majority
database
interest, merger, asset acqui
or
assets.
of
certain
(Please see below for the exact
sition,
acquisition
ofMajority
definitions ofAcquisition
Interest, Merger, and Asset Acqui
to
SDC-M&A
the
database.)
sitions, according
in which the acquirer must
Interest is a transaction
ofMajority
Acquisition
have held less than 50% and be seeking to acquire 50% or more (but less
than 100%) of the target company's stock.

of (All)
Value
Value ITA is the ratio of the total Transaction
Acquisitions
to
firm's
Total
the
fiscal
the
firm
the
made
year
during
by
Acquisitions
the
fiscal
at
of
the
Assets
6)
year.
(Item
beginning
Age is the number of years that the firm has been public.
of assets
classified as an acquisition
refers to transactions
Asset Acquisitions
The SDC
database.
or acquisition
of certain assets by the SDC-M&A
of assets as deals in which the assets
defines acquisition
M&A database
of a company, subsidiary, division, or branch are acquired. Acquisition
of certain assets is defined as deals in which sources state that certain
assets of a company, subsidiary, or division are acquired.
of
Value
is the ratio of the total Transaction
Asset Acquisitions
Value/TA
made by the firm during the fiscal year to the firm's
Asset Acquisitions
Total Assets
(Item 6) at the beginning of the fiscal year.
in which a firm is identified as the ulti
Asset Sales are all the transactions
or acquisition
of certain
mate parent of the target in asset acquisition
database.
assets in the SDC-M&A
Average Stock Return is the firm's average Stock Return (as defined below)
over the last 3 years.
is Total Assets
Book Debt
(Item 6) minus
Book Equity
(as defined below).

Financial
Opportunities,
and Firm Locations
559
is defined as Total Assets

Book Equity
liabilities (Item 181)
(Item 6) minus
sheet deferred taxes and investment tax credit (Item 35)
plus balance
minus Preferred Stock (as defined below).
Book Leverage
is Book Debt over Total Assets
(Item 6).
ITA is capital expenditures
(Item 128) over Total As
Capital Expenditures
sets (Item 6).
is the standard deviation of EBITDA/TA
Flow Std. Deviation
during
the sample period.
is cash and marketable
securities (Item 1) over Total Assets
Cash/nTA
(Item
6) minus cash (Item 1).
Cluster-Firm
is a dummy variable
that takes a value of one for firm-years
a
in which
firm's headquarters
(Metropolitan
as
Statistical Area
in 1990) that
identified by the U.S. Census Bureau
has 10 or more firms with the same three-digit SIC, and these firms
Cash
of the industry, and zero

comprise at least 3% of the Market Value
otherwise.
is a dummy variable
Cluster-MV
that takes a value of one for firm-years in
a
which
firm's headquarters
that represents
at least 10% of the Market Value of the firm's industry and that has at
least three firms with the same three-digit SIC, and zero otherwise.
Debt Rating
takes a value of one if the firm has an S&P
investment grade
long-term debt rating, and zero otherwise.
Dividend
takes a value of one if the firm pays a dividend (Item 26), and zero
otherwise.
EBITDA/TA
isEBITDA (Item 13) over laggedTotal Assets (Item 6).
Firm Acquisitions
refers to transactions
classified as Acquisition
ofMajority
or
Interest
in the SDC-M&A
database.
Merger
Firm Acquisitions
of
Value
Value/TA
Firm Acquisitions made by the firm during the fiscal year to Total Assets
Local

refers to All Acquisitions
in which the acquirer and the
Acquisitions
is determined
target are located within the same MSA. The target's MSA
by the target's state, city, and/or zip code given in the SDC Database.
Value of
Value/TA
Acquisitions
Local Acquisitions
Total Assets
Market Equity is common shares outstanding
(Item 25) times the stock price
Local
(Item 199).
Market Leverage
is Book Debt over Market Value
(as defined below).
ratio is Market Value
Market-to-Book
(as defined below) over Total Assets
(Item 6).
Market Value
is defined as liabilities
sheet de
(Item 181) minus balance
ferred taxes and investment tax credit (Item 35) plus Preferred Stock
(as definedbelow) plusMarket Equity (Item 25 x Item 199).
is a transaction
in which a combination of businesses
takes place
Merger
100% of the stock of a public or private company is acquired.

or
560
MSA
The Journal
ofFinance?
TA is the ratio of total dollar volume of All Acqui

MSA
I
Acquisitions
sitions conducted by firms located in an MSA during the fiscal year to
the sum of the Total Assets
(Item 6) of the firms in the MSA. For each
firm-year observation,
interest.
we compute
this variable
by excluding
the firm of
MSA R&D MSA

TA is the ratio of totalR&D expenses (Item46) ofall firms
I
located in an MSA to the sum of the Total Assets

(Item 6) of the firms in
the MSA. For each firm-year observation, we compute this variable by
excluding the firm of interest.
MSA
is the average
Stock Returns
stock return of all firms in the MSA
over the past 3 years. For each firm-year observation, we compute this
variable by excluding the firm of interest.
Net Book Leverage
is Book Debt minus cash and marketable
securities (Item
1) over Total Assets
(Item 6).
Net
is cash and marketable

securities
Cash/TA
debt (Item 34) over Total Assets
(Item 6).
Net Market Leverage
is Book Debt minus
cash
(Item 1) over Market Value.
(Item 1) minus
short-term
and marketable
securities
Number
ofFirms is the number of firms with the same three-digit SIC within
an MSA.
is the natural logarithm of the population
of the MSA.
Population
Growth
is
the
annual
of
the MSA.
Population
population growth
or re
to
if available,
is
Stock
value
(Item
10)
Preferred
liquidating
equal
or
if
value
value
(Item
56)
(Item
130).
available,
carrying
demption
in which the target (as defined

Public Acquisitions
a
is
SDC-M&A
firm.
the
database)
public
by
Value of
Public Acquisitions
Value/TA
Public Acquisitions
Total Assets
is a dummy variable
that takes a value of one if Compustat
R&D Dummy
as
R&D
(Item
46)
expense
missing, and zero otherwise.
reports
is defined as R&D expenses
(Item 6).
R&D/TA
(Item 46) over Total Assets
in
is the proportion of firms that are listed as acquirers
Ratio of Acquirers
or
asset
of
mergers,
interest,
acquisitions,
acqui
majority
acquisitions
Ratio
database.
sitions of certain assets as defined in the SDC-M&A
ofAsset Acquirers
or in an acquisition
of certain assets as defined
in an asset acquisition
in the SDC-M&A
database.
Firm
of
Acquirers
interest or in a merger as defined in the
in an acquisition
ofmajority
database.
SDC-M&A
is the number of firms with the same three-digit SIC in an
Ratio of Firms
MSA divided by the total number of firms with the same three-digit SIC.
is the proportion of firms that are listed as ac
Ratio of Local Acquirers
Ratio
ofmajority interest, mergers, asset acquisitions,

quirers in acquisitions
or acquisitions
of certain assets as defined in the SDC-M&A
database,

Financial
Opportunities,
and Firm Locations
561
and in which the acquirer and the target are located within the same
MSA.
is the proportion of firms that are listed as acquir
Ratio ofPublic Acquirers
or
ers in acquisitions
ofmajority
interest, mergers, asset acquisitions,
as
in
assets
the
defined
of certain
SDC-M&A
and
database,
acquisitions
in which the target is a public firm.
is the average EBITDA/TA
minus
the industry-year
Relative EBITDA/TA
status
of firms with similar cluster
average EBITDA/TA
(according to
the definition of cluster use in the corresponding
that is,
regression,
or Cluster-MV).
either Cluster-Firm
is Net Market Leverage minus the industry
Net Market Leverage
Net
Market
of firms with similar cluster status
year average
Leverage
to
the definition of cluster use in the corresponding
regres
(according
or Cluster-MV).
sion, i.e., either Cluster-Firm
Relative
Stock Return is Stock Return (as defined below) minus the industry
year average Stock Return of firmswith similar cluster status (according
to the definition of cluster use in the corresponding regression, i.e., either
or Cluster-MV).
Cluster-Firm
Relative
is the natural logarithm of sales (Item 12) in 1990 dollars.

Sales
Silicon Valley is a dummy variable
that takes a value of one if the firm is
code 7362 as defined by in the 1990 Census,
located in MSA
and zero
otherwise. MSA
code number 7362 includes San Francisco, Oakland,
and San Jose in California.
Stock Acquisitions
refers to all-stock financed All Acquisitions.
Stock Return is the firm's annual stock return.
(Item 8) over Total
Tangible Assets /TA is net property, plant, and equipment
Assets
(Item 6).
Total Assets (TA) is the book value of assets (Item 6).
Transaction
Value is total value of consideration
paid by the acquirer, ex
cluding fees and expenses. The dollar value includes the amount paid
for all common stock, common stock equivalents,
preferred stock, debt,
and stake purchases made within 6 months

options, assets, warrants,
of the announcement
date of the transaction.
Within Industry Acquisitions
inwhich the acquirer
and the target belong to the same three-digit SIC.
Within Industry Acquisitions
Value/TA
Value ofWithin Industry Acquisitions made by the firm during the fiscal
year to the firm's Total Assets
Within Industry Bidder
is a dummy variable that takes a value of one if the
firm is identified as an acquirer
in a Within
and
Industry Acquisition,
zero otherwise.
Within

in which the
Industry Public Acquisitions
and
the
to
the same three-digit SIC, and inwhich
acquirer
target belong
the target is a public firm.
Within Industry Public Acquisitions
is the ratio of the total Trans
Value/TA
action Value ofWithin
made by the firm
Industry Public Acquisitions

562
The Journal
ofFinance?
during the fiscal year to the firm's Total Assets

of the fiscal year.
(Item 6) at the beginning
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American Finance Association

Financial Structure, Acquisition Opportunities, and Firm Locations

This content downloaded from 202.185.34.1 on Sun, 28 Sep 2014 22:32:38 PM

THE JOURNAL OF FINANCE

VOL. LXV, NO. 2 APRIL 2010

ALMAZAN, ADOLFO DE MOTTA,

firms located within

In 1992, the apache

is from the University

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as essential, since their acquisition

that firms located in industry clusters

industry cluster in Silicon Valley.

the evidence on the relation between location and acquisition activity is

B, and Risk Management

This content downloaded from 202.185.34.1 on Sun, 28 Sep 2014 22:32:38 PM

and Firm Locations

This content downloaded from 202.185.34.1 on Sun, 28 Sep 2014 22:32:38 PM

(1995)). However, as is also recognized in this literature, firms anticipating good

it easier for firms to grow by acquiring

This content downloaded from 202.185.34.1 on Sun, 28 Sep 2014 22:32:38 PM

and Firm Locations

Like our study, these papers provide

We make three assumptions

in its leverage ratio c?. Further

To solve the model, we proceed by backward

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(for7 = 1,2 and j 96?.

v + Si ? pdi and acquires

the target for bj if bi > bj

max xdi+ yE(v +stdi

bj |bt> &/)Pr(fo;> bj).

The following result follows directly from equation

optimal debt ratio, d\, is lower when:

(ii) debt has a more negative

debt benefits are smaller

of debt to the non-M&A

(ii) debt has a more

The previous result suggests that the empirical importance of r is reduced

This content downloaded from 202.185.34.1 on Sun, 28 Sep 2014 22:32:38 PM

and Firm Locations

in clusters make more

than firms located

Next, we examine whether

in y and p. Given our conjecture that y is larger in clusters,

Our third hypothesis

considers the effect of a firm's location on its leverage.

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coefficient associated with K-, Cluster

(5) into (3), we obtain

(6) can be rewritten as:

4: The ratio of the estimates of the determinants

We examine firms covered in Compustat

chains, and concentrate instead on manufacturing

firms. Furthermore, because

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and Firm Locations

competition, in the interpretation of our results we abstract from product mar

(i) the number

located in a givenMSA, Number ofFirms; (ii) the number offirmswith the

consider all the firms that are included in Compustat

in the industry. Nonetheless,

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