Do Managers Give Hometown Labor an Edge?

Abstract

Based on the psychological theory of place attachments, managers favor hometown workers over others. Consistent with this prediction, I find that following periods of industry distress, establishments located near CEOs’ childhood homes see fewer employment and pay reductions and are less likely to be divested relative to other establishments within firms. While there is no direct evidence that this employment bias destroys firm value, managers only implement these policies when governance is weak, suggesting that this favoritism is suboptimal. Together these results provide direct evidence of employee favoritism and show that the idiosyncratic styles of managers impact corporate employment decisions.

Keywords: behavioral finance, managerial preferences, labor, place attachment

JEL Classification: G02, G30, J50