Both the U.S. money management industry and public firms are clustered geographically, but there is considerable misalignment between the two. In this paper, we study whether and how the geographic mismatch between investors and public firms affects corporate financial policies, firm valuation, and firm performance. We measure the investor-firm misalignment at the state level based on the log of one plus the ratio of the aggregate asset under management (AUM) of institutions in a state to the total market capitalization of public firms in the same state (AM Ratio). We find that firm valuation is high when firms are located in states with high AM Ratio and the effects are stronger for firms with higher level of equity dependence. We show that a greater presence of local institutional investors mitigates the financial constraints of local firms. Firms in high AM Ratio states invest more and their investments are less dependent on internal cash flow. These firms are more likely to issue equity while local institutions hold more of the newly issued equity. The high firm valuation in the high AM Ratio states seems to be persistent, but can be affected by shocks to the money management industry.

Keywords: Institutional Investors, Local Preference, Firm Valuation, Corporate Policy

JEL Classification Number: G11, G23, G32