Intriguing new research shows that CEOs who work close to their birthplaces are less likely to engage in financial misconduct
According to new research by Durham University Business School, local CEOs are less likely to transgress when compared to those who manage companies far from their hometown.
The study, which explored whether a link existed between a CEO’s birthplace proximity, and their financial ethical practices, also found that having a strong number of local investors, or ties to the local community were a deterrent to financial misconduct. Religion too was found to influence behaviour.
Undertaken by Dimitris Petmezas, Professor in Finance at Durham University Business School, the study gathered data on over 1,500 CEOs in the United States who worked at over 1,200 firms. The data explored CEOs’ personal characteristics such as the where they were born, but also any incidences of financial misconduct in their time occupying CEO roles, including earnings management, accounting fraud, opportunistic insider trading and other financial offenses.
Then, the researchers compared local CEOs – those whose firm’s headquarters were within 100 miles of their birthplace – to non-local CEOs, in order to understand whether birthplace proximity impacted on the likelihood of a CEO committing financial misconduct. The results revealed that non-local CEOs were much more likely to engage in such wrongdoing than their local peers.
The researchers hypothesise that this is because locally-based CEOs are more likely to have a strong personal relationship with their investors, shareholders, stakeholders and the wider community. As a result, they are less inclined to want to manipulate financial data, or even flat out lie, to investors; the reputational damage from misconduct would have substantially larger consequences for such CEOs who have a preference to live and manage firms in their hometown.
As part of the research, the authors also analysed data on CEOs who relocated from locally-based offices to premises further away from their birthplace. Here they found that such CEOs became more likely to commit financial misconduct when moving further away from their hometown.
“CEOs may commit financial misconduct to boost short-term gains or personal rewards, but this risks reputational damage, legal penalties, and long-term harm to the firm.”, says Professor Petmezas. “Local CEOs face greater accountability through community ties and reputational scrutiny, which helps deter unethical behaviour and ensures closer monitoring.”
In further explorations, the researchers found a similar affect existed amongst CFOs. Those based more locally to home were less likely to be complicit in financial transgressions.
The power of relationships and community
The duration of a CEO’s career was also a key factor in likelihood to act unethically. The longer a CEO was based locally, the less likely they were to act in improper ways. The researchers state that the power of relationships and community in business practice can be key drivers for keeping companies, and their leaders, accountable.
“When CEOs have investors and shareholders closely watching over them, as well as strong personal ties to the community they operate within, they are less likely to commit financial misconduct,” says Professor Petmezas. “Clearly, to ensure CEOs continue to act ethically, not only should CEOs be monitored, but also developing relationships with stakeholders beyond the organisation should be prioritised.”
About the study
The study was carried out by Dimitris Petmezas, Professor in Finance at Durham University Business School, alongside Dr Zicheng Lei, from King’s Business School; P. Raghavendra Ra, from the University of Cambridge; and Chen Yang, from the University of Glasgow. It is available to read in full in the Review of Accounting Studies journal, published by Springer.