How do investors perceive firms’ hiring of local CEOs? Evidence from the cost of equity capital

Abstract

According to Yonker (2017a), the U.S. executive labor market shows a striking “hiring home bias” in that firms are more likely to hire local CEOs (i.e., CEOs from their own states). We explore how investors perceive such hiring practices by examining whether they demand different costs of equity capital from firms led by local versus non-local CEOs. Our empirical evidence suggests that, on average, investors perceive hiring local CEOs positively by demanding lower costs of equity capital. The finding holds up to a battery of robustness tests. Cross-sectional tests show that the effect is more pronounced in firms that are more locally based, when firms potentially receive more local monitoring, when firms issue more earnings forecasts, and when firms have strong corporate governance. In addition, the level of social capital in the state where a firm is located attenuates the negative relation. Overall, we find evidence consistent with the notion that capital market participants price CEOs’ geographic characteristics and provide implications to the boards of directors on CEO-firm matches.