IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v150y2025ics0264999325001488.html
   My bibliography  Save this article

CEO locality and R&D investment efficiency: Evidence from China

Author

Listed:
  • Cao, Yue
  • Dong, Yancen
  • Chen, Wenrui
  • Fu, Jiaqian
  • Luo, Huitao

Abstract

This study investigates the impact of CEO locality on R&D investment efficiency, addressing the underexplored economic impacts of informal managerial characteristics in corporate decision-making. Using data from Chinese A-share listed firms from 2008 to 2020, we find that CEO locality significantly reduces upward distortion in R&D expense manipulation, driven by alleviating information asymmetry and managerial myopia. The mitigating effect is more pronounced in firms with higher board ownership and greater cash reserves, in regions with robust legal systems, closer to local regulatory authorities, and in cultural environments characterized by Confucian and collaborative values. Moreover, local CEOs’ efforts to curb R&D manipulation can curb opportunistic innovation activities, thereby mitigating innovation bubbles. These findings not only shed new light on the role of informal institutions in corporate governance but also provide implications for executive recruitment strategies and innovation oversight policies.

Suggested Citation

  • Cao, Yue & Dong, Yancen & Chen, Wenrui & Fu, Jiaqian & Luo, Huitao, 2025. "CEO locality and R&D investment efficiency: Evidence from China," Economic Modelling, Elsevier, vol. 150(C).
    • Handle: RePEc:eee:ecmode:v:150:y:2025:i:c:s0264999325001488
    DOI: 10.1016/j.econmod.2025.107153
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999325001488
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2025.107153?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Yan, Kai & Zhang, Ziyi & Yang, Lisi & Cao, Yuqiang & Shan, Yaowen, 2024. "Capital generates green: Evidence from China's national innovation system policy," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
    3. Huang, Wei & Rhee, S. Ghon & Suzuki, Katsushi & Yasutake, Taeko, 2022. "Do investors value shareholder perks? Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Zhou, Zhongsheng & Li, Zhuo & Du, Shanzhong & Cao, June, 2024. "Robot adoption and enterprise R&D manipulation: Evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    5. Kedia, Simi & Rajgopal, Shiva, 2011. "Do the SEC's enforcement preferences affect corporate misconduct?," Journal of Accounting and Economics, Elsevier, vol. 51(3), pages 259-278, April.
    6. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    7. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    8. Pang, Silu & Hua, Guihong, 2024. "How does digital tax administration affect R&D manipulation? Evidence from dual machine learning," Technological Forecasting and Social Change, Elsevier, vol. 208(C).
    9. Yuqiang Cao & Zhiwu Chen & Meiting Lu & Zihui Xu & Yizhou Zhang, 2023. "Does FinTech Constrain Corporate Misbehavior? Evidence from Research and Development Manipulation," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 59(10), pages 3129-3151, August.
    10. Mingle Zhou & Yu Wang & Xiaohui Huang & Gang Li, 2023. "Can open government data policy improve firm performance? Evidence from listed firms in China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(5), pages 2593-2603, July.
    11. Mao, Jinzhou & Xu, Donghai & Yang, Shaoze, 2023. "Female executives and corporate R&D manipulation behavior: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    12. Andrew C. Chang, 2018. "Tax policy endogeneity: evidence from R&D tax credits," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 27(8), pages 809-833, November.
    13. Sumit Agarwal, 2010. "Distance and Private Information in Lending," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    14. Estelle Y. Sun, 2021. "The Differential Role of R&D and SG&A for Earnings Management and Stock Price Manipulation," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 242-275, March.
    15. Angus C. Chu & Yuichi Furukawa & Sushanta Mallick & Pietro Peretto & Xilin Wang, 2021. "Dynamic effects of patent policy on innovation and inequality in a Schumpeterian economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1429-1465, June.
    16. Zhao Chen & Zhikuo Liu & Juan Carlos Suárez Serrato & Daniel Yi Xu, 2021. "Notching R&D Investment with Corporate Income Tax Cuts in China," American Economic Review, American Economic Association, vol. 111(7), pages 2065-2100, July.
    17. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    18. Xiong, Jiacai & Yang, Zelin & Zhu, Yushu, 2024. "Does information infrastructure curb corporate R&D manipulation? Evidence from China," Economics Letters, Elsevier, vol. 235(C).
    19. Yanan He & Xindong Zhang & Panpan Hao & Xiaoyong Dai & Haiyan Xue, 2023. "Tax incentives and upward R&D manipulation – evidence from the R&D tax deduction policy in China," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 20(4), pages 1507-1529, June.
    20. Kubick, Thomas R. & Lockhart, G. Brandon & Mills, Lillian F. & Robinson, John R., 2017. "IRS and corporate taxpayer effects of geographic proximity," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 428-453.
    21. Jiang, Junyan & Zhang, Muyang, 2020. "Friends with benefits: Patronage networks and distributive politics in China," Journal of Public Economics, Elsevier, vol. 184(C).
    22. Xu, Ronghua & Shen, Yuxin & Liu, Meng & Li, Lu & Xia, Xuehua & Luo, Kaixin, 2023. "Can government subsidies improve innovation performance? Evidence from Chinese listed companies," Economic Modelling, Elsevier, vol. 120(C).
    23. Tatsuro Iwaisako, 2025. "Welfare-maximizing patent length in a dynamic general equilibrium model," Oxford Economic Papers, Oxford University Press, vol. 77(1), pages 19-41.
    24. Shenggang Ren & Yue Wang & Yucai Hu & Ji Yan, 2021. "CEO hometown identity and firm green innovation," Business Strategy and the Environment, Wiley Blackwell, vol. 30(2), pages 756-774, February.
    25. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    26. Liu, Haiming & Chiang, Yao-Min, 2022. "Confucianism and IPO underpricing," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    27. Lin, Jietong & Wang, Xin & Xu, Mingzhi, 2024. "Industrial policy persistence and local economic performance: The role of subsidy allocation in China," Economic Modelling, Elsevier, vol. 141(C).
    28. Zhao, Shuang & Guan, Yunfang & Zhou, Haiyan & Hu, Feng, 2024. "Making digital technology innovation happen: The role of the CEO's information technology backgrounds," Economic Modelling, Elsevier, vol. 140(C).
    29. Myors, Brett & Lievens, Filip & Schollaert, Eveline & Van Hoye, Greet & Cronshaw, Steven F. & Mladinic, Antonio & Rodríguez, Viviana & Aguinis, Herman & Steiner, Dirk D. & Rolland, Florence & Schuler,, 2008. "Broadening International Perspectives on the Legal Environment for Personnel Selection," Industrial and Organizational Psychology, Cambridge University Press, vol. 1(2), pages 266-270, June.
    30. Dang, Jianwei & Motohashi, Kazuyuki, 2015. "Patent statistics: A good indicator for innovation in China? Patent subsidy program impacts on patent quality," China Economic Review, Elsevier, vol. 35(C), pages 137-155.
    31. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    32. Yaqin Hu, 2023. "Local CEOs, career concerns and voluntary disclosure," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 565-597, March.
    33. Long, Yingzi & Cai, Dapeng, 2023. "Why do governments subsidize R&D-Intensive foreign direct investment?," Economic Modelling, Elsevier, vol. 129(C).
    34. Xiu, Zongfeng & Liu, Ran & Feng, Pengshuo & Yin, Jingwei, 2023. "Does social culture matter for firms' access to trade credit? Evidence from China," Economic Modelling, Elsevier, vol. 119(C).
    35. Myors, Brett & Lievens, Filip & Schollaert, Eveline & Van Hoye, Greet & Cronshaw, Steven F. & Mladinic, Antonio & Rodríguez, Viviana & Aguinis, Herman & Steiner, Dirk D. & Rolland, Florence & Schuler,, 2008. "International Perspectives on the Legal Environment for Selection," Industrial and Organizational Psychology, Cambridge University Press, vol. 1(2), pages 206-246, June.
    36. Roland Hodler & Paul A. Raschky, 2014. "Regional Favoritism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 995-1033.
    37. Chen, Jing & Huang, Xiaoqi & Liu, Xinghe & Xiong, Hao & Xu, Cheng, 2023. "Self-discipline or self-interest: CEOs’ hometown identity and excess perks," Finance Research Letters, Elsevier, vol. 52(C).
    38. Megginson, William L. & Ullah, Barkat & Wei, Zuobao, 2014. "State ownership, soft-budget constraints, and cash holdings: Evidence from China’s privatized firms," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 276-291.
    39. Scott E. Yonker, 2017. "Do Managers Give Hometown Labor an Edge?," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3581-3604.
    40. Weidong Zhang & Pengbo Hu & Jenny J. Wang & Zeyu Li & Hongrui Zheng & Xue Gao, 2022. "Equity incentive plans and R&D investment manipulation: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 4157-4183, September.
    41. Mary J. Benner, 2010. "Securities Analysts and Incumbent Response to Radical Technological Change: Evidence from Digital Photography and Internet Telephony," Organization Science, INFORMS, vol. 21(1), pages 42-62, February.
    42. Luo, Wei & Zhang, Yi & Zhu, Ning, 2011. "Bank ownership and executive perquisites: New evidence from an emerging market," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 352-370, April.
    43. Cheng, Jie & Huang, Dan & Wu, Yanling, 2023. "Managerial perception on competition and strategic R&D decisions1," Economic Modelling, Elsevier, vol. 123(C).
    44. Chen, Jing & Hu, Peiwen & Liu, Shan & Liu, Xinghe, 2024. "Too scared to make mistakes at home: CEO hometown identity and corporate risk-taking," Research in International Business and Finance, Elsevier, vol. 70(PB).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Shihao & Wang, Keyun & Guo, Mengting & Maqsood, Umer Sahil & Chen, Xuezhao, 2025. "Common institutional ownership and R&D manipulation," Technological Forecasting and Social Change, Elsevier, vol. 217(C).
    2. Pang, Silu & Hua, Guihong, 2024. "How does digital tax administration affect R&D manipulation? Evidence from dual machine learning," Technological Forecasting and Social Change, Elsevier, vol. 208(C).
    3. Zhou, Zhongsheng & Li, Zhuo & Du, Shanzhong & Cao, June, 2024. "Robot adoption and enterprise R&D manipulation: Evidence from China," Technological Forecasting and Social Change, Elsevier, vol. 200(C).
    4. Wang, Deli & Liu, Xiaoyuan & Hu, Shiyang & Wu, Shangrui, 2025. "The value of digital government transformation: Evidence from R&D subsidy efficiency in China," International Review of Financial Analysis, Elsevier, vol. 102(C).
    5. Ding, Zhiguo & Kei, Brian C.W. & Kwok, Wing Chun & Lin, Qiqing & Wong, George, 2025. "Latent corporate governance: The impact of Confucianism on the value of cash holdings," Research in International Business and Finance, Elsevier, vol. 77(PA).
    6. Fu, Fanjie & Yao, Shujie & Fang, Jing & Zhang, Fan & Lin, Chuan, 2025. "CEOs' hometown connections and optimism in analyst earnings forecasts: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 1031-1052.
    7. Chen, Mengtao, 2024. "ESG performance and firm misconduct: Evidence from R&D manipulation," Economics Letters, Elsevier, vol. 237(C).
    8. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    9. Jian Zhang, 2018. "Public Governance and Corporate Fraud: Evidence from the Recent Anti-corruption Campaign in China," Journal of Business Ethics, Springer, vol. 148(2), pages 375-396, March.
    10. Muhammad Kaleem Khan & Yixuan Qin & Chengsi Zhang, 2022. "Financial structure and earnings manipulation activities in China," The World Economy, Wiley Blackwell, vol. 45(8), pages 2593-2621, August.
    11. Xu, Nianhang & Li, Min & Xie, Rongrong & Chan, Kam C., 2024. "Double standards? The adverse impact of chairperson hometown ties on corporate green innovation," Journal of Corporate Finance, Elsevier, vol. 88(C).
    12. Joseph P. H. Fan & Li Jin & Guojian Zheng, 2016. "Revisiting the Bright and Dark Sides of Capital Flows in Business Groups," Journal of Business Ethics, Springer, vol. 134(4), pages 509-528, April.
    13. Chen, Lirong & Gao, Feiyang & Guo, Tongtong & Huang, Xuanhao, 2023. "Mixed ownership reform and the short-term debt for long-term investment of non-state-owned enterprises: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    14. Dong, Wang & Ke, Yun & Li, Shuo & Chen, Xiangyu & Wan, Peng, 2021. "Does social trust restrain excess perk consumption? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1078-1092.
    15. Hongjin Zhu & Yue Pan & Jiaping Qiu & Jinli Xiao, 2022. "Hometown Ties and Favoritism in Chinese Corporations: Evidence from CEO Dismissals and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 176(2), pages 283-310, March.
    16. Chen, Yinghui & Chen, Miao & Huang, Yong, 2025. "Multiple large shareholders and cash holdings: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 103(C).
    17. Ge, Jiaying & Cahan, Steven F. & Chen, Jerry W., 2024. "Curbing myopic R&D behavior: How private meetings serve as a channel," The British Accounting Review, Elsevier, vol. 56(6).
    18. Lou, Xu & Qian, Aimin & Zhang, Chenyu, 2021. "Do CEO's political promotion incentives influence the value of cash holdings: Evidence from state-owned enterprises in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    19. Long, Zhineng & Xuan, Wenshuang & Zhang, Yanyu, 2023. "The dilemma of hometown identity: Evidence from Chinese corporate cost behavior," International Review of Financial Analysis, Elsevier, vol. 90(C).
    20. Fu, Fanjie & Fang, Jing & Zhang, Fan & Yao, Shujie & Ou, Jinghua, 2024. "CEOs' hometown connections and corporate risk-taking: Evidence from China," Emerging Markets Review, Elsevier, vol. 60(C).

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:150:y:2025:i:c:s0264999325001488. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.