Financial Centers And Portfolio Performance: Evidence From An Emerging Market

Abstract

How does location of a firm’s headquarter effect its performance? This paper answers this question by using the data from India. This paper shows that portfolio of firms headquartered in Mumbai, the main financial center of the country, outperform portfolio of firms headquartered in other cities. Our results show that average returns, Sharp ratios, Farinelli and Tibiletti ratio, and CAPM alphas for portfolios comprising of firms headquartered in Mumbai are higher than their counterpart portfolios comprising of firms headquartered in other cities. We argue that firms headquartered in the financial center have better information environment than other firms. One of the channels via which improvement in information environment takes place is the clustering of firms in the financial center. We believe that, for any given level of resources, it is relatively cost effective for stock market participants to expend their resources on clustered firms to obtain value relevant information than on dispersed firms, thereby improving information environment of firms headquartered in the financial centers relative to other firms. Our arguments claim that better information environment of firms headquartered in the financial centers helps in maintaining investors’ confidence.