Geography and the Market for CEOs

I examine the role of geography in the labor market for CEOs. I begin by investigating the joint distribution of CEO state of origin and firm headquarters location and find that the frequency with which firms hire CEOs from their own state is five times more than is expected under a model where geography plays no role in the hiring process. When considering only external hiring decisions, this figure falls to just under three times. I show that geography affects both labor supply and labor demand. Specifically, smaller, less R&D-intensive firms located in less desirable locations, with weaker board incentive alignment, and whose previous CEO was locally hired are more likely to hire local CEOs. Compensation and turnover are lower for local CEOs than for non-local CEOs and adjusted operating performance significantly decreases when firms replace non-locally hired CEOs with local CEOs. These findings are consistent with the existence of search costs, agency conflicts and CEO geographic preference. ∗Contact: Scott E. Yonker, Doctoral Student, Fisher College of Businesss, The Ohio State University, Columbus, Ohio, 43210. I appreciate comments by Andrew Karolyi and René Stulz and valuable discussions with Kewei Hou, Bernadette Minton, and Anil Makhija. I thank Rudi Fahlenbrach for providing data on founder CEOs.