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I examine the role of geography in the market for CEOs and find that firms hire locally five times more often than expected if geography were irrelevant to the matching process. This local matching bias is widespread and exists even among the largest U.S. firms. Tests reveal that both labor supply and demand influence local matching. Compensation and unforced turnover are lower for local than for nonlocal CEOs, and the compensation of local CEOs depends on local labor market factors, unlike that of nonlocal CEOs. These findings suggest the presence of market segmentation and contrast with much of the prior literature, which explicitly or implicitly assumes a single national market. This paper was accepted by Lauren Cohen, finance .

In line with the psychological theory of place attachments, managers favor hometown workers over others. Consistent with this prediction, I find that following periods of industry distress, establishments located near CEOs’childhood homes experience fewer employment and pay reductions and are less likely to be divested relative to other firm establishments. While it is not possible to directly test whether this employment bias destroys firm value, managers only implement these policies when governance is weak, suggesting that this favoritism is suboptimal. Together, these results provide direct evidence of employee favoritism and show that idiosyncratic manager styles impact corporate employment decisions.

We show that chief executive officers (CEOs) exhibit a hometown bias in acquisitions. Firms are over twice as likely to acquire targets located in the states of their CEOs' childhood homes than similar targets domiciled elsewhere. Small, private home-state deals underperform other small, private deals, and the bias is stronger when acquirer governance is lax, suggesting that CEOs acquire private home-state targets for their own benefits. In contrast, large, public home-state acquisitions are value enhancing. CEOs create value in public home-state acquisitions by avoiding extremely poor deals and through deals with higher synergies. Thus, both agency issues and hometown advantages drive home-state acquisitions.

We find that socially connected fund managers have more similar holdings and trades. The overlap of funds whose managers reside in the same neighborhood is considerably higher than that of funds whose managers live in the same city but in different neighborhoods. These effects are larger when managers share a similar ethnic background, and are not explained by preferences. Valuable information is transmitted through these peer networks: a long-short strategy composed of stocks purchased minus sold by neighboring managers delivers positive risk-adjusted returns. Unlike prior empirical work, our tests disentangle the effects of social interactions from community effects.

We study the importance of trust in the investment advisory industry by exploiting the geographic dispersion of victims of the Madoff Ponzi scheme. Residents of communities that were exposed to the fraud subsequently withdrew assets from investment advisers and increased deposits at banks. Additionally, exposed advisers were more likely to close. Advisers who provided services that can build trust, such as financial planning advice, experienced fewer withdrawals. Our evidence suggests that the trust shock was transmitted through social networks. Taken together, our results show that trust plays a critical role in the financial intermediation industry.

We show that familiarity affects the portfolio decisions of mutual fund managers. Controlling for fund location, funds overweight stocks from their managers' home states by 12% compared with their peers. In team-managed funds, home-state overweighting is 37% larger than the fund location effect. The home-state bias is stronger if the manager is inexperienced, is resource-constrained, or spent more time in his home state. Home-state stocks do not outperform other holdings, confirming that home-state investments are not informed. The overweighting also leads to excessively risky portfolios.

Firms whose human capital is concentrated in a few irreplaceable employees lack diversification in their human capital stock, exposing them to key human capital risk. Using disclosures of “key man life insurance” to measure this risk, we show that exposed firms are riskier. These younger, smaller, growth firms have abnormally high volatility, and following announcement of key employee departures, the most exposed firms lose 8% of their value. Key employees tend to be highly educated. They are four times more likely to hold PhD degrees than top managers, and firms with key human capital are more innovative.

Using exogenous wealth shocks stemming from the collapse of the housing market, we show that managers who experience substantial losses in their home values subsequently reduce risk in their delegated funds. The decline in fund risk comes through reductions in idiosyncratic risk and tracking error, suggesting that the behavior is likely driven by career concerns. Our paper provides evidence that idiosyncratic personal preferences affect mutual fund managers’ professional decisions and offers a methodology for testing for manager effects that is not subject to the selection critique of Fee, Hadlock, and Pierce (2013).

I examine the role of geography in the market for CEOs and find that firms hire locally five times more often than expected if geography were irrelevant to the matching process. This local matching bias is widespread and exists even among the largest U.S. firms. Tests reveal that both labor supply and demand influence local matching. Compensation and unforced turnover are lower for local than for nonlocal CEOs, and the compensation of local CEOs depends on local labor market factors, unlike that of nonlocal CEOs. These findings suggest the presence of market segmentation and contrast with much of the prior literature, which explicitly or implicitly assumes a single national market.

Based on the psychological theory of place attachments, native local managers should be more rooted in their communities than non-locals and should act accordingly. Consistent with this, local managers are 33% less likely to lay of employees than their non-local industry peers following industry distress. Additionally, when managers are forced to lay off employees, establishments near managers' homes are less likely to experience layoffs than those located elsewhere. Locals pay for these higher employment levels by spending cash, cutting investment, and selling assets. While there is no direct evidence that labor-friendly policies of locals have a differential impact on firm performance or value, only locals with weaker incentives implement these policies, suggesting that favoritism by locals may be suboptimal. Taken together these results suggest that managerial preferences impact corporate employment decisions.