Local CEOs Are Less Susceptible to ‘Managerial Myopia’

CEOs who aren’t native to the region are more likely to value short-term financial wins over the long-term growth of the organization.

Local CEOs Are Less Susceptible to 'Managerial Myopia' thumbDOES IT MATTER whether a CEO is a hometown native or has relocated from elsewhere? Absolutely, say a team of finance and accounting professors in China. They find that nonlocal CEOs are more likely than their homegrown counterparts to favor short-term financial fixes.

George Yang of the Chinese University of Hong Kong, Shufang Lai of Southern University of Science and Technology, and Zengquan Li of Shanghai University of Finance and Economics examined data related to 2,000 CEOs at S&P 1500 U.S. firms from 1992 to 2012. The scholars wanted to know whether CEOs with local ties were less likely than nonlocal CEOs to succumb to “managerial myopia,” which refers to a CEO’s decision to cut research and development spending to offset short-term decreases in company earnings.

Local CEOs were 25.5 percent less likely to decrease R&D spending than nonlocal CEOs, even if doing so would offset slight drops in earnings. Firms with local CEOs also paid 7.3 percent more taxes to their states than firms with nonlocal CEOs, suggesting local CEOs felt a greater sense of social responsibility to their regions.

The more connected CEOs were to local religious, civic, and political organizations, the less likely they were to “focus on near-term payoffs,” says Yang in CUHK’s China Business Knowledge. “Hiring a local CEO gives an advantage to a firm by elevating the CEO’s longrunning concern for her reputation.”

Read the working paper “East, West, Home’sBest: Are Local CEOs Less Myopic?"

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