The purpose of this study is to investigate whether the CEO’s birthplace location matters for stock return comovement.
Our main methodology builds upon Pirinsky and Wang (2006), which measures the comovement of the firm’s stock returns by estimating time-series regressions of the firm’s stock returns on an index composed of returns from firms whose CEOs are from the same birthplace state, with a variety of controls.
This paper demonstrates a new comovement effect based on the CEO birthplace. We find than at the comovement effect mostly comes from the townsman bias channel, suggesting a positive relationship between investors’ preference for holding stocks in firms whose CEOs are from their locations – townsman bias – and the comovement effect. The effect remains strong after controlling for industry, CEO cultural and behavioral factors, firm fundamentals, CEO changes and characteristics in various fixed effects setups.
The primary limitation of this research is the availability of detailed CEO birthplace information from public sources. We identified CEOs from the ExecuComp database for our sample period and manually collected their birthplace data. However, the birthplace information is publicly accessible only for a part of the database, with birth state data being more commonly available than specific birthplaces.
This paper introduces a new comovement effect based on the CEO’s birthplace, consistent with Barberis and Shleifer (2003), suggesting that investors perceive companies managed by CEOs sharing the same home state during their formative years as having similar perceived characteristics (townsman bias). This perception of similarity leads to return comovement via correlated trading shocks leading to implications for portfolio diversification and investment decision-making.
