Local CEOs and asymmetric cost behaviour

Abstract

We examine the effect of a local CEO (i.e., the CEO's state of origin is the same as his/her firm's headquarter states) on a firm's strategic capacity choices and the resulting cost asymmetry. We find that firms with local CEOs demonstrate greater cost asymmetry. Place attachment, local advantage and agency cost theory could all influence a firm's cost asymmetry. To differentiate between these explanations, we use a consequence test that examines the association between asymmetric costs and future performance. Our results indicate that the greater cost asymmetry in firms with local CEOs is associated with higher future firm value, which suggests that the greater cost asymmetry from local CEOs arises due more to a local advantage. We include several cross‐sectional tests to explore when this result is more or less pronounced. Our results suggest that geographically segmented labour markets play an important role in a firm's resource capacity decisions.