The Triumph of Locality in Troubled Times: Local CEOS, Social Capital, and Credit Ratings Under Uncertainty

Abstract

We emphasize the relevance of the management team's local knowledge in the presence of business uncertainty. Exploiting a hand-collected dataset covering CEOs' birthplace, we provide robust evidence that firms with local CEOs are more likely to have higher credit ratings and preserve their debt ratings in the presence of high business uncertainty. Firms with local CEOs are significantly more likely to neutralize the exogenous uncertainty shocks, partly through a more efficient use of social capital. The effects are notably relevant in the case of small and undiversified firms as well as those firms with more financial constraints or in the industries with higher market competition. Overall, our result highlight the usefulness of local knowledge.

Keywords: Local CEOs; Credit ratings; Business uncertainty; Social capital; Financial constraints; Industry competition