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

• Published date: 01 May 2024
• Author: Yan Tong,Yuan Tian,Zhangfan Cao
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/corg.12553

ORIGINAL ARTICLE

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

efficiently?

Yan Tong

1

| Yuan Tian

1

| Zhangfan Cao

3

1

School of Management and Economics,

Beijing Institute of Technology, Beijing, China

3

Nottingham University Business School

China, University of Nottingham Ningbo

China, Ningbo, China

Correspondence

Zhangfan Cao, Nottingham University

Business School China, Ningbo, China.

Email: zhangfan.cao@hotmail.com;zhangfan.

cao@nottingham.edu.cn

Funding information

National Natural Science Foundation of China,

Grant/Award Numbers: 71972011, 71972010,

72072012; National Social Science Fund of

China, Grant/Award Number: 22BGL088

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 fundamen-

tals, 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 gover-

nance, 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 mana-

gerial implications for firms to consider the impact of the idiosyncratic top executive

styles as one of the noncontractual factors on firms' employment decisions.

KEYWORDS

corporate governance, corporate myopia, CEO hometown identity, labor investment efficiency,

local CEOs

1|INTRODUCTION

The sense of hometown identity, as one of the most important

affective bonds for Chinese people, has been deeply rooted in

Chinese culture since ancient times. China consists of 34 provincial

administrative re gions and 56 ethnic g roups (Bian et al., 2019) , and

each province has its own distinctive features, including local dia-

lects, religions, cu stoms, cultures, an d environment. The un iqueness

of different regions offers us a rich context to investigate the effect

of hometown identity. Although a handful of studies feature the

impact of CEO hometown identity on corporate decisions (Lai

et al., 2020;Renetal.,2021), there is rare evi dence of how CEO

hometown identity af fects labor and employ ment decisions, and

there are different views on whether local CEOs are value-

enhancing or not (Lai et al ., 2020;Yonker,2017b). This paper tend s

to fill this void by inve stigating whethe r CEO locality (i.e. , local

CEOs) leads to higher l abor investment eff iciency (i.e., lowe r devia-

tions of labor inves tment from the level justified b y economic funda-

mentals), thus adding to the debate regarding the influence of local

CEOs on value generat ion.

Received: 8 August 2022 Revised: 5 July 2023 Accepted: 6 July 2023

DOI: 10.1111/corg.12553

522 © 2023 John Wiley & Sons Ltd. Corp Govern Int Rev. 2024;32:522–548.wileyonlinelibrary.com/journal/corg

Recent literature documents CEOs' hometown effects on corpo-

rate decision-making and performance. Numerous existing studies

investigate the influence of CEO locality by primarily focusing on how

local CEOs make decisions about corporate innovation. Lai et al.

(2020) suggest that local CEOs behave less myopically and are less

likely to cut R&D expenditures for beating analyst forecasts or avoid-

ing earnings decreases. Consistently, Ren et al. (2021) find similar

results that when CEOs work in their home areas, they tend to invest

more in R&D and develop more patent applications. In addition,

Garcia-Meca et al. (2021) further find that local CEOs have a positive

impact on a firm's green innovation performance. Apart from innova-

tion decisions, some prior studies also explore the role of CEO locality

in affecting business activities from other perspectives. Yonker

(2017a) finds that the firms' establishments located near CEOs' home-

towns may experience fewer employment and pay reductions during

industry distress. Jiang et al. (2019) find that firms are more likely to

acquire targets located in the CEOs' home states than similar targets

located elsewhere. Lim and Nguyen (2021) show that banks open

more branches and make more lending in areas proximate to the

CEOs' hometowns. Based on the empirical evidence above, prior liter-

ature confirms that CEOs' hometown identity plays a crucial role in

the corporate decision-making process. However, to the best of our

knowledge, no prior studies investigate whether CEOs' hometown

identity would affect their firms' efficiency of labor investment. This

paper aims to complement this stream of literature by investigating

the influence of CEO locality on firms' labor investment efficiency.

In light of prior literature on CEO locality, there are two compet-

ing views on how local CEOs could affect labor investment efficiency.

On the one hand, CEO locality may reduce labor investment efficiency

because local CEOs' attachment to their hometowns can give rise to

favoritism, which hinders firms from making optimal employment

decisions (Yonker, 2017a). Local CEOs may prioritize their personal

preferences over the needs of their firms and are reluctant in making

decisions that can adversely affect their hometowns. Hence, firms led

by local CEOs tend to make suboptimal employment decisions, partic-

ularly firing decisions, as they are reluctant to conduct workforce

reduction in their hometowns, thus causing lower labor investment

efficiency.

On the other hand, CEO locality might also increase labor invest-

ment efficiency. First, for most people, their hometowns have the

greatest significance and connotations compared with other places,

which elicits strong emotional bonds and influences one's cognition

and behavior (Morgan, 2010; Scannell & Gifford, 2010). Based on

place attachment theories, people tend to consider their hometowns

as special and revered places where they strongly care for the well-

being of local communities and intend to maintain a good reputation

(Mesch, 1996; Relph, 1976). Prior literature on place attachment high-

lights that having an emotional bond or connection with a specific

location or environment can facilitate one's goal pursuit by stimulating

the self-regulation processes required for goal attainment

(Korpela, 1989). Consistently, numerous extant studies find that local

CEOs are more incentivized to consider the interests of various share-

holders and are more long-term oriented by behaving less myopically

(Lai et al., 2020; Ren et al., 2021). From this perspective, firms led by

local CEOs are likely to make more efficient labor investment because

of their long-term orientation in their decision-making. Moreover,

prior studies have identified long-term orientation and harmonious

stakeholder relationships as influential factors that facilitate firms'

labor recruitment and retention and alleviate agency costs, which ulti-

mately can contribute to higher labor investment efficiency (Cao &

Rees, 2020; Lai et al., 2020; Ren et al., 2022). Second, compared with

nonlocal CEOs, local CEOs are likely to exploit their geography-

specific skills and home advantage, which could also contribute to

more efficient investment decisions. For instance, Jiang et al. (2019)

suggest that home advantage can manifest as ex-ante information and

local CEOs are likely to be more well-connected in their hometowns

and thus have better knowledge of the prospects of their firms, the

local labor market, as well as industry and local economic projections.

Therefore, local CEOs can use their home advantage by exploiting soft

information to facilitate more efficient labor investment by timely

adjusting their recruitment and retention strategy and policies. As a

result, firms led by local CEOs are anticipated to have higher labor

investment efficiency. Based on the discussion and opposite predic-

tions above, the impact of CEO locality on labor investment efficiency

remains an important yet untested empirical question.

To answer our research question, we employ a sample of publicly

traded firms listed on the Shanghai and Shenzhen stock exchanges in

China from 2005 to 2020 to examine the effect of CEO locality on

labor investment efficiency. Our results show that the positive influ-

ence of CEO locality on labor investment efficiency is both statisti-

cally significant and economically salient. Specifically, we find that

firms with local CEOs are associated with higher investment effi-

ciency, that is, lower deviations of labor investment from the level jus-

tified by economic fundamentals. As well as being statistically

significant, our results show that the influence of local CEOs on labor

investment efficiency is also economically important: one standard

deviation increase in the CEO locality is associated with an approxi-

mately 8.40% decrease in abnormal net hiring, which indicates

improved labor investment efficiency. We extend our main analysis

by splitting our sample into labor over- and under-investment sub-

samples and find that the CEO locality helps alleviate both over- and

under-investment in labor, especially from hiring practices.

To explore the cross-sectional variations, we further empirically

test the impact of CEO locality on labor investment efficiency based

on local CEOs' hometown advantage and their firms' corporate gover-

nance conditions as well as regional heterogeneity of CEO cultural

backgrounds. We find that the impact of CEO locality on labor invest-

ment is more pronounced when firms have higher levels of local busi-

ness integration (i.e., better information/home advantage), poorer

corporate governance, and higher agency costs. The results imply that

the long-term orientation and information/home advantage that local

CEOs possess could help their firms to alleviate agency problems and

ultimately facilitate more efficient labor investment. Additionally, the

regional heterogeneity shows that the effect of CEO locality on labor

investment efficiency is more pronounced when CEOs' hometowns

have stronger unselfishness culture, patriotism culture, and Confucian

TONG ET AL.523