Local Financial Capability and Firm Investment Efficiency

SYNOPSIS Local financial capability (LFC) reflects the financial expertise and investment activity of firms’ local labor pool and stakeholder base. Based on the resources-based theory, we expect firms headquartered in areas with high LFC, measured using publicly available tax data, to be associated with better investment outcomes. We find a positive association between high LFC and investment efficiency that is consistent with both a direct labor pool and an indirect stakeholder effect. We find that accounting and finance occupational intensity, as opposed to educational intensity, explains the overall association, differentiating our measure from those used in prior studies. We also show that high LFC is positively associated with future firm-level returns on capital investment. Our LFC measure provides practitioners with a unique way to identify pools of financially capable capital investment funders or internal investment decision-makers. Data Availability: Data are publicly available from the sources cited in the text. JEL Classifications: E24; G31; J24; M21; M51.