A CEO’s geographic background plays a crucial role in how investors assess the firm's risk. Firms led by local CEOs tend to face lower expected returns.
A new study shows that firms with local CEOs see their equity costs reduced by about 10.1 basis points compared to those led by non-local CEOs, a significant reduction in the context of corporate finance.
This reduction in the cost of equity capital can be attributed to several factors, including local knowledge and a better understanding of the firm's environment.
Local CEOs benefit from strong community ties and an in-depth understanding of local market conditions, regulatory environments, and even social dynamics. This helps them navigate challenges more effectively, reducing the perceived business risks.
Maintaining investor confidence
The lower cost of equity capital is significant because it directly impacts a firm’s ability to raise capital and invest in growth. Companies with local CEOs are viewed as having more stability, with investors recognizing that these CEOs are less likely to engage in risky ventures that could jeopardize their reputation in the local market. As a result, local CEOs are able to maintain investor confidence, leading to more favorable investment conditions.
This research also explored various factors that influence how local CEOs affect the cost of equity. It found that the effect is more pronounced in firms that are more locally based, where local monitoring is stronger, and where the firm regularly issues earnings forecasts.
In addition, the overall level of social capital in the CEO’s home state also plays a role in how much the cost of equity is reduced. Interestingly, firms in states with lower social capital saw a more significant impact from hiring local CEOs.
Sources:
Seo, J., Ding, W., Ke, Y., Shi, Z., How do investors perceive firms’ hiring of local CEOs? Evidence from the cost of equity capital, The British Accounting Review, https:// doi.org/10.1016/j.bar.2025.101694.
https://www.sciencedirect.com/science/article/abs/pii/S0890838925001441