The effect of CEO locality on the cost of debt financing: the role of regional heterogeneity

ABSTRACT

We examine whether chief executive officer (CEO) locality affects firms’ cost of debt. Drawing upon place attachment theories suggesting individuals develop affective bonds with their hometowns, we find robust evidence that firms employing local CEOs tend to have a lower cost of debt than those with non-local CEOs. More importantly, we find that regional heterogeneity plays an important role in shaping the relationship from economic and cultural perspectives. The effect is more pronounced in regions where the economies and marketisation are less developed. Furthermore, we show that the effect of CEO locality is stronger in regions with collectivism and regions with low social trust. Our findings hold up to numerous robustness checks and endogeneity tests. Overall, our study highlights the prominent role of the geographically segmented CEO labour markets as an intrinsic but underexplored non-contractual factor for value creation.

KEYWORDS:

• local chief executive officers
• locality
• cost of debt
• place attachment theory

JEL:

• G3
• G10
• Z12

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. According to the Wind database, by the end of 2021, the total outstanding bonds of Chinese firms (corporate bonds, enterprise bonds and medium-term notes) reached 20,072 trillion RMB, nearly 29 times that of 2008 (702 trillion RMB).

2. Based on prior studies (Lai et al., 2020), board directors are likely to be from the local business circle, and therefore they tend to have more information about local CEOs in recruitment. As a result, directors are more confident and informative about their locally hired CEOs who would, in turn, face less pressure to boost short-term performance.

3. We thank the anonymous reviewer for providing this suggestion about the collinearity test. In addition, in untabulated results, our stationary tests also suggest that the variable SPREAD is not seriously subject to stationarity concerns.

4. In untabulated results, the correlation matrix also shows a negative and statistically significant correlation between local CEOs and the cost of debt.

5. In untabulated results, as an additional test we also find that the effect of local CEO on the cost of debt is more pronounced for non-SOE firms.

Additional information

Funding

This study was supported by the National Natural Science Foundation of China [grant numbers 72072012, 71972010 and 71972011] and the National Social Science Fund of China [grant number 22BGL088].