A U.S. study shows local CEOs spend more money than leaders from outside the state. Here's why this is a good thing.
The research shows that when U.S. firms hire CEOs from the same state as their headquarters, it can profoundly affect how companies manage resources, especially during fluctuations in sales. Firms led by local CEOs are more likely to exhibit "asymmetric cost behavior," also known as cost stickiness.
Cost stickiness occurs when a firm's costs, such as salaries or operational expenses, do not decrease as much during sales declines compared to how much they increase during sales growth. This often reflects a deliberate decision to retain resources during downturns in anticipation of a rebound in demand. While this approach has traditionally been seen as inefficient, it often enhances long-term company value.
Emotional bias or strategic foresight?
The advantages of local CEOs can be attributed to several factors. First, their emotional connection to their home state—referred to as "place attachment"—may make them more inclined to protect local jobs and investments, fostering stability within the community. Second, their familiarity with local markets, regulations, and networks gives them a "local advantage," enabling them to make better-informed decisions during uncertain times.
While some may argue that this behavior reflects emotional bias or self-interest, the findings suggest that local CEO's cost stickiness is typically a result of strategic foresight. By retaining resources, they allow their firms to capitalize on future opportunities, transforming short-term costs into long-term value creation.
How large is the difference?
The study examined firms led by local CEOs—defined as those whose country of birth matches the company’s headquarters country—and found that their unique leadership traits lead to significant differences in cost behavior. Specifically, administrative costs in these firms decreased by 0.667% for every 1% drop in sales, compared to a larger decrease of 0.725% in firms with non-local CEOs. This ability to retain resources during sales downturns positions local CEO-led firms to respond more effectively to future growth opportunities.
These insights have important implications for businesses. Hiring local CEOs can be particularly beneficial in industries with concentrated operations or high uncertainty. By exploring the unique influence of local CEOs on cost behavior, this study also challenges traditional views on cost management and demonstrates how cost stickiness, when guided by local expertise and strategy, can drive sustained growth.
What about Europe?
This study raises questions about whether local CEOs would have similar effects on cost stickiness in other regions, such as Europe. In Europe, cultural and language differences might make place attachment and local knowledge even more important, possibly leading to similar or stronger results. For example, local CEOs in Europe might better understand their region’s needs and make smarter decisions during tough times.
However, differences in governance, labor rules, and economic conditions mean we cannot assume the same results apply everywhere. More research is needed to see if these findings hold true outside the U.S.