2019/07/01 by Matthew Ma, Matthew Huei‐Ming, Jing Pan +2 · 2 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Corporate Finance and Governance #Auditing, Earnings Management, Governance #Financial Markets and Investment Strategies
paper · doi:10.2308/accr-52506
ABSTRACT This study documents the existence of local employment preferences for corporate executives and examines how the compensation of executives' local peers affects their own performance, risk-taking decisions, and financial reporting decisions. We find that external hires of new CEOs (CFOs) are five (eight) times more likely to be from local firms than non-local firms. We also find that local tournament incentives—as proxied by the pay gap between an executive and higher-paid executives in the area—are associated with stronger performance, greater risk taking, and more financial misreporting. We find consistent results using a difference-in-differences analysis that exploits plausibly exogenous variation in local tournament incentives caused by the sudden death of a local CEO. Our findings are consistent with executives taking actions to compete for a promotion to a nearby firm with higher pay.