When Timothy Simin and Brent Ambrose set out to solve a decades-old puzzle in financial markets, they didn't expect the answer to lie in housing prices and regional geography. But after analyzing nearly 10,000 companies across three U.S. stock exchanges from 2000 to 2019, the Penn State researchers discovered something that could fundamentally shift how investors think about returns: where a company chooses to plant its headquarters matters far more than how fast it's growing.
The mystery they were chasing is known as the "value-growth premium"—a phenomenon that has perplexed economists for years. Value stocks, typically representing mature, stable companies in manufacturing and healthcare, consistently outperform growth stocks like tech companies, which should theoretically deliver higher returns. Existing finance models couldn't explain why. So Simin and Ambrose did something novel: they brought real estate economics into the conversation, looking at how regional housing markets affect company profitability.
The findings are striking. Portfolios constructed by considering both a company's headquarter location and regional housing costs produced returns three times higher than portfolios built solely on growth metrics. The reason, the researchers found, comes down to simple economics: companies located in expensive housing markets like Silicon Valley and New York face significantly higher labor and infrastructure costs. When workers demand higher salaries because housing is expensive, and companies must invest more to build or maintain facilities in pricey regions, less money flows back to shareholders.
"Where firms locate their headquarters matters," Simin said in describing the research, published in the Journal of Empirical Finance. The team sorted all 9,308 companies they examined by whether they were "value" stocks (trading below their asset value) or "growth" stocks (trading above it), then categorized them again based on whether their headquarters were in high-cost or low-cost housing regions. The pattern was clear: growth firms in expensive housing markets generated the worst returns for investors, precisely because they were plowing capital into expensive labor and infrastructure rather than returning it to shareholders.
This doesn't mean companies should flee places like Silicon Valley or New York—those regions offer genuine advantages, from proximity to other high-tech firms to access to skilled talent pools. But Simin and Ambrose argue the findings carry a practical message: companies should understand the financial trade-offs their location decisions create, and investors should factor regional economics into their portfolio strategies.
The insights may also ripple outward to local policymakers. Ambrose points out that housing affordability isn't just a social issue—it directly affects firms' ability to offer competitive returns. "If a community is trying to encourage more firms to locate in their community, they can work to make sure housing is affordable," he noted. By making housing costs manageable, regions can help companies keep labor expenses down and returns higher, creating a virtuous cycle that benefits both businesses and investors.
The research opens a new lens on an old financial mystery, suggesting that the next great investment opportunity may be less about finding the next growth stock and more about understanding the geography beneath it.