KDI Journal of Economic Policy

Korea Development Institute (한국개발연구원)
권호 표지

CEO to the Rescue: Residential Proximity of Private Firm CEOs and the Evolution of Corporate Profitability

  • Received : 2016.06.27
  • Published : 2016.11.30
Download PDF
⟨ Previous Next ⟩

Abstract

This paper documents how the net profit margin of private firms improves when the CEOs of the companies relocate their primary residence to be closer to the corporate headquarters. By reviewing 127 Korean non-public companies belonging to 66 private business groups, we find that the top managers move closer to the headquarters when the profitability of the firms has recently deteriorated. A one basis point decline in the margin causes CEOs to relocate their homes approximately two kilometers closer to their corporate headquarters. The profit margin rebounds after their relocation. This finding implies that physical proximity can serve as a proxy for personal commitment.

Keywords

References

  1. Allen, Natalie J. and John P. Meyer. 1990. "The Measurement and Antecedents of Affective, Continuance and Normative Commitment to the Organization." Journal of occupational psychology 63 (1): 1-18. https://doi.org/10.1111/j.2044-8325.1990.tb00506.x
  2. Aksoy, Asu and Neill Marshall. 1992. "The Changing Corporate Head Office and its Spatial Implications." Regional Studies 26 (2): 149-162.
  3. Brown, Jeffrey R., et al. 2005. "Neighbors Matter: The Geography of Stock Market Participation." Available at SSRN 673510.
  4. Brown, Jeffrey R., Nellie Liang, and Scott Weisbenner. 2007. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut." The Journal of Finance 62 (4): 1935-1965. https://doi.org/10.1111/j.1540-6261.2007.01261.x
  5. Bergstresser, Daniel and Thomas Philippon. 2006. "CEO Incentives and Earnings Management." Journal of financial Economics 80 (3): 511-529. https://doi.org/10.1016/j.jfineco.2004.10.011
  6. Carlton, Dennis W. 1983. "The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables." The Review of Economics and Statistics 65: 440-449. https://doi.org/10.2307/1924189
  7. Chaney, Thomas, David Sraer, and David Thesmar. 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment." American Economic Review 102: 2381-2409. https://doi.org/10.1257/aer.102.6.2381
  8. Coval, Joshua D. and Tobias J. Moskowitz. 2001. "The Geography of Investment: Informed Trading and Asset Prices." Journal of Political Economy 109.
  9. Davis, James C. and J. Vernon Henderson. 2008. "The Agglomeration of Headquarters." Regional Science and Urban Economics 38 (5): 445-460. https://doi.org/10.1016/j.regsciurbeco.2008.05.002
  10. Dougal, Casey, Christopher A. Parsons, and Sheridan Titman. 2015. "Urban Vibrancy and Corporate Growth." The Journal of Finance 70 (1): 163-210. https://doi.org/10.1111/jofi.12215
  11. Duranton, Gilles and Diego Puga. 2001. "Nursery Cities: Urban Diversity, Process Innovation, and the Life Cycle of Products." American Economic Review: 1454-1477.
  12. Duranton, Gilles and Diego Puga. 2005. "From Sectoral to Functional Urban Specialisation." Journal of urban Economics 57 (2): 343-370. https://doi.org/10.1016/j.jue.2004.12.002
  13. Froot, Kenneth A. and Emil M. Dabora. 1999. "How are Stock Prices Affected by the Location of Trade?"Journal of Financial Economics 53(2): 189-216. https://doi.org/10.1016/S0304-405X(99)00020-3
  14. Gan, Jie. 2007. "Collateral, Debt Capacity, and Corporate Investment: Evidence from a Natural Experiment." Journal of Financial Economics 85 (3): 709-734. https://doi.org/10.1016/j.jfineco.2006.06.007
  15. Garcia-Mila, Teresa and Therese J. McGuire. 2002. "Tax Incentives and the City." Brookings-Wharton Papers on Urban Affairs 2002 (1): 95-132. https://doi.org/10.1353/urb.2002.0005
  16. Ghosh, Chinmoy, Mauricio Rodriguez, and C. F. Sirmans. 1995. "Gains from Corporate Headquarters Relocations: Evidence from the Stock Market." Journal of Urban Economics 38 (3): 291-311. https://doi.org/10.1006/juec.1995.1034
  17. Grinblatt, Mark and Matti Keloharju. 2001. "How Distance, Language, and Culture Influence Stockholdings and Trades." The Journal of Finance 56 (3): 1053-1073. https://doi.org/10.1111/0022-1082.00355
  18. Henderson, J. Vernon and Yukako Ono. 2008. "Where Do Manufacturing Firms Locate Their Headquarters?" Journal of Urban Economics 63 (2): 431-450. https://doi.org/10.1016/j.jue.2007.02.006
  19. Hong, Harrison, Jeffrey D. Kubik, and Jeremy C. Stein. 2004. "Social Interaction and Stock‐Market Participation." The Journal of Finance 59 (1): 137-163. https://doi.org/10.1111/j.1540-6261.2004.00629.x
  20. Hong, Harrison, Jeffrey D. Kubik, and Jeremy C. Stein. 2005. "Thy Neighbor's Portfolio:Word‐of‐mouth Effects in the Holdings and Trades of Money Managers." The Journal of Finance 60 (6): 2801-2824. https://doi.org/10.1111/j.1540-6261.2005.00817.x
  21. Jaffe, Adam B., Manuel Trajtenberg, and Rebecca Henderson. 1993. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations." The Quarterly Journal of Economics: 577-598.
  22. Korniotis, George M. and Alok Kumar. 2013. "State‐Level Business Cycles and Local Return Predictability." The Journal of Finance 68 (3): 1037-1096. https://doi.org/10.1111/jofi.12017
  23. Lee, J. W. and Danny Miller. 1999. "Research Notes and Communications People Matter: Commitment to Employees, Strategy and Performance in Korean Firms." Strategic Management Journal 20: 579-593. https://doi.org/10.1002/(SICI)1097-0266(199906)20:6<579::AID-SMJ37>3.0.CO;2-C
  24. Malloy, Christopher J. 2005. "The Geography of Equity Analysis." The Journal of Finance 60 (2): 719-755. https://doi.org/10.1111/j.1540-6261.2005.00744.x
  25. Orpurt, Steven F. 2004. "Local Analyst Earnings Forecast Advantages in Europe." Available at SSRN 515723.
  26. Papke, Leslie E. 1991. "Interstate Business Tax Differentials and New Firm Location: Evidence from Panel Data." Journal of Public Economics 45 (1): 47-68. https://doi.org/10.1016/0047-2727(91)90047-6
  27. Porter, Michael E. November, 1996. What is Strategy?
  28. Pirinsky, Christo, and Qinghai Wang. 2006. "Does Corporate Headquarters Location Matter for Stock Returns?" The Journal of Finance 61 (4): 1991-2015. https://doi.org/10.1111/j.1540-6261.2006.00895.x
  29. Strauss-Kahn, Vanessa, and Xavier Vives. 2009. "Why and Where Do Headquarters Move?" Regional Science and Urban Economics 39 (2): 168-186. https://doi.org/10.1016/j.regsciurbeco.2008.07.001
  30. Uysal, Vahap B., Simi Kedia, and Venkatesh Panchapagesan. 2008. "Geography and Acquirer Returns." Journal of Financial Intermediation 17 (2): 256-275. https://doi.org/10.1016/j.jfi.2007.12.001
  31. Zhu, Ning. 2002. The Local Bias of Individual Investors.