No place like home: Do local CEOs invest in labor more efficiently?

Abstract

Research question/issue

This study investigates whether local CEOs make more efficient investment decisions in labor.

Research findings/insights

We find that firms hiring local CEOs are associated with lower deviations of labor investment from the level justified by economic fundamentals, that is, higher labor investment efficiency. More importantly, we explore the role of information advantage, corporate governance, and CEO cultural background in shaping the relationship. We find the effect of CEO locality is more pronounced when firms have higher levels of local business integration, poorer corporate governance, and higher agency costs. Moreover, the impact of CEO locality is stronger when CEOs' hometowns have stronger unselfishness culture, patriotism culture, and Confucian culture. Our results are robust to a battery of endogeneity tests and robustness checks.

Theoretical/academic implications

Our study reveals that CEO locality, as one of the idiosyncratic top executive styles, can hinder managers from myopic behavior by investing more efficiently in labor, as a key factor of production and a major internal stakeholder, for a firm's success.

Practitioner/policy implications

Given human capital is considered the primary source of firms' competitive advantage, our study provides useful insights and managerial implications for firms to consider the impact of the idiosyncratic top executive styles as one of the noncontractual factors on firms' employment decisions.