Dive Brief:
- Company leaders born in the same state as their company headquarters take a longer-term view of performance and are less likely to sacrifice investments like research and development to beat analysts’ estimates or avoid earnings decreases, an academic study finds.
- "Local CEOs make consistent long-term decisions in paying more state tax and being more socially responsible than nonlocal CEOs," researchers wrote in a paper published in The Accounting Review.
- Firms with local CEOs also have better financial performance and enjoy higher valuation, suggesting executives' resist cutting long-term projects because they're forward-looking, not because they avoid tough decisions.
Dive Insight:
Typically, financial incentives solve corporate myopia, or short-term executive thinking. These incentives include stock awards to increase executives' ownership of company equity, or agreements that motivate them to undertake projects where potential payoff is some time away.
But financial incentives often don't change behavior. The researchers found, for instance, that long-term thinking among executives only improved by 4% if they had high company ownership interest.
By contrast, long-term thinking improved 20% when companies hired a local CEO.
This longer-term thinking could be the result of attachment, the researchers think. Local executives, they said, "need to overcome a higher emotional hurdle to take opportunistic short-term actions that risk their firms’ long-term viability and eventually their local reputation. They have a much longer horizon in balancing short-term financial gains and long-term life and career outcomes."
The study is based on an analysis of R&D funding by 1,903 CEOs of S&P 1500 companies, 378 of whom were locals, during a 25-year period.
The researchers defined local executives as those who were born in the state where a CEO’s company was headquartered.
Under the findings, local CEOs were significantly less likely than others to reduce annual R&D spending in general, and, more specifically, as a way to beat analysts' consensus earnings forecasts or to avoid having to report decreases in annual earnings.
In addition, local CEOs proved significantly less likely than non-locals to reduce R&D in the final year of their tenure, when they’re particularly prone to do so.
"Our evidence suggests that local CEOs are more long-term-oriented than nonlocal CEOs," the researchers said. "This finding should be of interest to investors, analysts, board directors and regulators."
East, West, Home’s Best: Do Local CEOs Behave Less Myopically? is based on research by Shufang Lai of Southern University of Science and Technology, Shenzhen, China; Zengquan Li of Shanghai University of Finance and Economics; and Yong George Yang of the Chinese University of Hong Kong. The findings area published in the March issue of The Accounting Review, published by the American Accounting Association.
