Local CEOs are less likely to be corrupt

The study examined whether a CEO’s proximity to their birthplace influenced their financial ethical practices. The findings suggest that a strong number of local investors, or ties to the local community serve as deterrents to financial misconduct. 

Research across US firms

Conducted by Dimitris Petmezas, Professor in Finance, alongside Dr Zicheng Lei (King’s Business School), P. Raghavendra Ra (University of Cambridge), and Chen Yang, (University of Glasgow), the study gathered data on over 1,500 CEOs in the United States who worked at over 1,200 firms.

The researchers explored CEOs’ personal characteristics, including their birthplaces, as well as instances of financial misconduct during their time as CEOs. These offences included earnings management, accounting fraud, opportunistic insider trading and other financial offenses.

Comparing local and non-local CEOs

To assess the impact of birthplace proximity, the researchers categorised CEOs into two groups:

• Local CEOs – those whose firm’s headquarters were within 100 miles of their birthplace.
• Non-local CEOs – those managing firms further away from where they were born.

The results revealed that non-local CEOs were significantly more likely to engage in financial wrongdoing than their local counterparts.

Why do local CEOs act more ethically?

The researchers suggest that local CEOs are more accountable due to their personal relationship with investors, shareholders, stakeholders and the wider community. Given the potential reputational damage, local CEOs have greater incentives to act ethically. The risk of being exposed for misconduct carries more severe personal and professional consequences for those deeply embedded in their communities.

The study also examined CEOs who moved from locally-based offices to locations further from their birthplace. The findings indicate that as CEOs moved away from their hometowns, they became more likely to commit financial misconduct.

The researchers found similar trends among Chief Financial Officers (CFOs), with those working closer to home being less likely to engage in financial misconduct. Additionally, the longer a CEO remained in their local area, the less likely they were to act unethically.

The study underscores the power of relationships and community ties in maintaining ethical business practices.

More information

• Find out more about Professor Dimitris Petmezas from our Department of Finance.
• Read the full article in Review of Accounting Studies.
• The School’s research.