East, West, Home’s Best: Do Local CEOs Behave Less Myopically?

The Accounting Review, Forthcoming

61 Pages Posted: 4 Oct 2017 Last revised: 7 May 2019

See all articles by Shufang Lai

Shufang Lai

Southern University of Science and Technology

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: October 3, 2017

Abstract

We test whether CEOs working near their childhood homes (i.e., local CEOs) are less likely than nonlocal CEOs to make myopic investment decisions. Place attachment theories suggest that people develop mutual caretaking relationships with their birthplaces. In addition, executive labor markets face less information asymmetry about local CEOs, resulting lower pressure on local CEOs for quick profits. Consistent with the prediction, we find that local CEOs are less likely to cut R&D expenditures for beating analyst forecasts or avoiding earnings decreases. These results are corroborated by the finding that in their last year of office local CEOs are significantly less likely to cut R&D than nonlocal CEOs. The CEO locality effect is stronger when more local business interests are embedded in the firm, i.e., when the firm’s business is more concentrated in the CEO’s birth state and the residents of the CEO’s birth state have a higher inclination to invest in local firms. The effect is also more significant when the residents of the CEO’s birth state have stronger local social bond, i.e., when the state has lower population mobility and more social capital. Local CEOs’ longer horizons are consistently manifested in their other decisions such as paying more state tax and being more socially responsible in business operation.

Keywords: Local CEO, Corporate Myopia, Short-Termism

JEL Classification: G00, G30, M41

Suggested Citation

Lai, Shufang and Li, Zengquan and Yang, Yong George, East, West, Home’s Best: Do Local CEOs Behave Less Myopically? (October 3, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3047568 or http://dx.doi.org/10.2139/ssrn.3047568

Shufang Lai

Southern University of Science and Technology ( email )

No 1088, xueyuan Rd.
Xili, Nanshan District
Shenzhen, Guangdong 518055
China

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Yong George Yang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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