Growing pains: geographic expansion and labor investment efficiency

Abstract

This research examines the impact of geographic dispersion on firm-level labor investment efficiency. We find that geographically-dispersed firms exhibit lower labor investment efficiency, and that the negative association between geographic dispersion and labor investment efficiency takes form in both overinvestment and underinvestment. Further analyses suggest information asymmetry as the underlying mechanism for the efficiency loss. We also present that geographic dispersion leads to greater labor investment inefficiency in those firms operating in soft information environments and those employing more skilled labor. Finally, our results indicate that labor investment inefficiency accounts for the value discount of geographically-dispersed firms, highlighting the role of human capital investment in firm valuation for firms pursuing geographic diversification.