When in Rome: Local social norms and income differences

Abstract

We investigate whether social capital influences tournament incentives and income differences between the chief executive officer (CEO) and median worker. We find that firms headquartered in US counties with stronger norms of cooperation or social capital have lower tournament and income differences. Firm value is higher when compensation is consistent with local norms. The results hold for alternative measures of social capital, instrumental variables, and quasi-experiments related to the legalization of marijuana and firm headquarter relocation. These findings suggest that local social norms influence income differences and firm performance.

Awe of the blue minds: Location, corporate social responsibility, and firm value

“…Hilary and Hui (2009) find that firms headquartered in areas with higher levels of religiosity are more risk-averse. Further, Burns et al (2022) show that firms located in counties with stronger norms of cooperation or social capital have lower tournament and income differences between CEOs and median workers, which consequently affects firm performance. The location also affects CEO power and board composition (Francis et al, 2016;Knyazeva et al, 2013), and corporate governance and financial decisions (Gao et al, 2011).…”

Does informal governance matter to institutional investors? Evidence from social capital

“…Along this line of thinking, prior research has provided evidence that firms surrounded by richer social capital exhibit less opportunistic and self‐serving tendency. In particular, firms located in high social capital regions are associated with superior corporate social responsibility (Jha & Cox, 2015), less corporate tax avoidance (Hasan et al., 2017b), more restrained CEO compensation (Hoi et al., 2019), a smaller pay gap between the CEO and other executives/workers (Burns et al., 2022), higher financial reporting quality (Jha, 2019), and more efficient usage of corporate resources (Gao et al., 2021). These studies indicate that managers of firms located in high social capital regions tend to behave in an ethical and altruistic fashion.…”