SSRN Id4452390

Dynamic CEO-Board Cultural Proximity*
Philip G. Berger
University of Chicago
philip.berger@chicagobooth.edu
Wei Cai
Columbia University
wc2419@gsb.columbia.edu
Lin Qiu
Purdue University
qiu223@purdue.edu
May 2023
Abstract
Theory suggests that cultural proximity between the CEO and the board of directors can play a
crucial role in shaping CEO-board dynamics. Using novel data, we measure the cultural proximity
between CEOs and directors of U.S. S&P 1500 firms based on their first and last names. We
document that CEO-board cultural proximity increases over the years after a new CEO comes in.
We also explore plausibly exogenous CEO turnovers and find robust results. Importantly, the
dynamic of increasing cultural proximity is not driven by existing CEO-board networks and is
more pronounced for CEOs with higher bargaining power. We then find that the cultural proximity,
on average, is associated with better strategic decision-making. However, for firms with weak
governance, greater cultural proximity is associated with worse decision-making. Taken together,
our findings highlight the role of CEO-board cultural proximity in corporate governance.
Keywords: CEO-board cultural proximity; CEO-board dynamics
*
We thank Tim Baldenius, Matthias Breuer, Francois Brochet, Hans Christensen, Tyler De Groot (discussant),
Aishwarrya Deore (discussant), Aiyesha Dey, Yonca Ertimur, Fabrizio Ferri, Jon Glover, Wei Jiang, Anthony Le,
Jing Li, Sarra Salib (discussant), Stephen Penman, Andrea Prat, Shiva Rajgopal, Suraj Srinivasan, Charles Wang,
Yuan Zou, and workshop participants at Columbia Business School, the 2023 Hawaii Accounting Research
Conference, the 2023 AAA Management Accounting Section Midyear Meeting and the 2022 AAA Annual Meeting.
We thank Jiehang Yu for her excellent research assistance. All errors are our own.
Electronic copy available at: https://ssrn.com/abstract=4452390

I. INTRODUCTION
Culture implicitly impacts how people communicate and interact with each other (Guiso,
Sapienza and Zingales 2006, 2015). Recent research suggests that the cultural background of
executives has a lasting effect on how they communicate with the capital market (Brochet, Miller,
Naranjo and Yu 2019). One important group of people that the CEO interacts with is the board of
directors. The board must review and approve major corporate strategies and plans proposed by
the CEO, as well as fundamental operating and financial decisions. The CEO-board relationship
therefore affects firms in a significant way and requires more understanding, as emphasized by
Adams, Hermalin and Weisbach (2010). We argue that the proximity between the CEO’s and
directors’ cultural backgrounds can play a crucial role in shaping the CEO-board relationship. In
this study, we examine dynamic CEO-board cultural proximity ⎯ how the CEO-board cultural
proximity evolves over the years after a new CEO joins the company and a variety of implications
of this evolution on corporate governance.
We define CEO-board cultural proximity as the average similarity in cultural dimensions
in Hofstede (2010)’s framework between a company’s CEO and its directors. We hypothesize that
cultural proximity between the CEO and directors can shape CEO-board dynamics through
implicit bias and may evolve over CEO tenure. People who share the same cultural background
have similar hidden assumptions, group norms, and values, reducing the need for explicit
communication (McDonald and Gandz 1992; Crémer 1993). Therefore, cultural proximity serves
as an implicit contract in organizations and a substitute for explicit communication (O’Reilly 1989;
Kreps and Shepsle 1996; Hermalin and Weisbach 2003; Baker and Gompers 2003). In addition,
cultural backgrounds may also be a primary mechanism driving the homophily phenomenon,
which is likely the fundamental driver for forming of social networks, political alignment, and

even friendship (McPherson, Smith-Lovin and Cook 2001). Given that CEOs gain more
bargaining power over a longer tenure and can exert greater influence over the board, we expect
cultural proximity between CEOs and directors may dynamically evolve over the CEO’s tenure.
Despite the role cultural proximity may play in shaping the CEO-board relationship, there
is limited empirical evidence on this subject. Two major empirical challenges potentially explain
the dearth of research. First, cultural characteristics are usually studied in multinational settings,
which have considerable endogeneity concerns and can be hard to generalize from. Results can be
driven by unobservable factors associated with different countries, such as the language, the legal
system, the economic environment, and the institutional environment. Second, cultural proximity
is usually unobservable and therefore difficult to measure. We attempt to overcome these
challenges by constructing a granular measure of CEO-board cultural proximity based on a large
sample of CEOs and directors from S&P 1500 companies. Specifically, we use a novel dataset to
measure CEO-board cultural proximity based on the first and last names of CEOs and directors at
the firm-year level. The United States setting has the important advantage that it is an immigrant
country with substantial variation in cultural backgrounds. By focusing on U.S. firms, we are able
to examine the effect of cultural heritage while holding constant other factors such as language
and the legal system.
We first document the phenomenon that CEO-board cultural proximity increases over time
after a new CEO takes office. We find that, compared with the year when the CEO initially
assumed the position, the CEO-board cultural proximity increases by 11.5% of the standard
deviation of the cultural proximity measure’s distribution by the end of her third year, and by 13.9%
of the standard deviation of the measure’s distribution by the end of her sixth year. After the new
CEO has been in office for eight years, the cumulative increase in cultural proximity is

approximately twice as large as the initial increase that occurred right after the CEO turnover.
These economic magnitudes are meaningful, as board composition has been found to be quite
persistent. Graham, Kim and Leary (2020) document that, in the post-SOX era, the percentage of
outside directors decreases on average by only 0.08% of the standard deviation of the distribution
of this measure each year after a CEO turnover event, with the effect insignificant. Our findings
suggest that as a CEO stays longer in the job, the board of directors becomes more culturally
similar to the CEO.
These CEO-board cultural proximity dynamics are likely important, yet are not well
understood. Hermalin and Weisbach (1998)’s model suggests that as CEOs gain bargaining power
through longer tenure, they negotiate for less monitoring from independent directors. However, in
the post-SOX era, eighty percent of S&P 1500 firms’ directors are independent in the sense that
they are not strictly affiliated with their firms, reflecting both compliance with SOX regulations
and increasing pressure from dissenting shareholders (Ertimur, Ferri, and Oesch 2018). We posit
that, in the face of these regulatory requirements and dissenting shareholder pressures, the dynamic
bargaining process between the CEO and the board is still present albeit more subtle. Our findings
suggest that powerful CEOs may influence board composition in a more implicit way.
Importantly, we show that this CEO-board dynamic is robust when the CEO turnover is
exogenous, i.e., turnover due to the prior CEO’s death, poor health condition, or natural retirement,
thus mitigating the concern that an omitted factor drives both the change in CEO and the change
in board composition. Moreover, we find that the evolution of CEO-board cultural proximity is
not driven by existing CEO-director networks. A potential alternative explanation for our results
is that CEO-board cultural proximity captures the existing networks between CEOs and directors
(e.g., grey directors). To address this concern, we control for CEO-director social ties through past

or current employment and find robust results. Thus, our measure of CEO-board cultural proximity
is not merely capturing an existing CEO-director network.
We then consider two potential channels by which CEO-board cultural proximity increases
over CEO tenure. The CEO-power channel suggests that successful CEOs gain more bargaining
power as their tenure increases and can therefore influence board composition to a greater extent.
Alternatively, the entrenchment channel predicts that mediocre CEOs entrench themselves and
inefficiently gain excess control over the board. We find that our results are mainly driven by
CEOs with higher bargaining power proxied by successful performance, which is consistent with
the CEO-power channel.
Last, we examine whether and how CEO-board cultural proximity is associated with
strategic decision-making. Corporate strategic decisions, such as mergers and acquisition decisions,
are complex tasks that take considerable time, involve multiple procedures and potential risks, and
require substantial coordination between the CEO and the board of directors (Bruner and Perella
2004). A priori, the role of CEO-board cultural proximity in strategic decision-making is
ambiguous. On one hand, cultural proximity may improve coordination between the CEO and the
board due to reduced information frictions and enhanced communication (Van den Steen 2010).
On the other hand, CEO-board cultural proximity may increase the tendency toward groupthink
(Janis 1972). We find that, on average, CEO-board cultural proximity is associated with better
strategic decision-making. This is consistent with cultural proximity between the CEO and the
board improving communication and thereby enhancing decision-making. However, for firms with
weak governance, greater cultural proximity is associated with worse M&A performance. Overall,
our results indicate that cultural proximity promotes coordination when corporate governance is
strong, but may raise groupthink concerns when corporate governance is weak.

We conduct several robustness tests. A common challenge in cross-firm analysis is that the
results can be driven by factors such as corporate culture, organizational structure, and local labor
market conditions. We address this challenge by conducting within-firm tests by using firm fixed
effects to control for unobservable time-invariant firm characteristics. In addition, we include year
fixed effects to control for time-specific shocks such as regulation changes and social movements.
Our study makes several contributions. First, we contribute to the literature on the cultural
heritage of corporate leaders by examining the interrelation between the CEO’s and board
members’ cultural heritage, i.e., the cultural proximity between CEO and board, rather than
studying these parties separately. Prior literature has primarily focused on the effect on corporate
outcomes of either the CEO’s or directors’ cultural backgrounds. For example, Brochet, Miller,
Naranjo, and Yu (2019) find that the ethnic backgrounds of executives from different countries
have a persistent effect on their disclosure patterns, while Bernile, Bhagwat and Yonker (2018)
find that more diverse ethnic backgrounds within a board leads to lower firm risk and more
innovation. However, as CEOs and directors do not work in silos in the decision-making process,
investigating the effect of cultural proximity between these parties is a critical area of inquiry.
Second, the dynamic evolution of the CEO-board relationship is important yet
understudied, as prior empirical research on board independence largely focuses on cross-sectional
tests with mixed findings. For example, Graham, Kim, and Leary (2020) find no significant
relation between CEO tenure and board independence as measured by the fraction of independent
directors for the sample period from 2002 to 2007. Baker and Gompers (2003) find a positive
(insignificant) relationship between CEO tenure and percentage of independent directors, whereas
Boone, Field, Karpoff, and Raheja (2007) find that CEO tenure is negatively related with board
independence. Adams, Hermalin and Weisbach (2010) have called for studies that “shed more

direct empirical light on the dynamic nature of the CEO-board relationship within-firms.” We
contribute by providing evidence on the dynamic evolution of CEO-board cultural proximity.
More broadly, we contribute to the literature by identifying the granular cultural heritage
of CEOs as well as directors based on first and last names, which together serve as a strong
indicator of cultural heritage, and by constructing a measure of the cultural proximity between the
CEO and the directors. We also propose an approach that generates a more comprehensive dataset
for CEO and director cultural heritage, which, unlike previous studies, is not subject to the
constraint of an immigrant having to arrive at a certain port during a specific period. Specifically,
we use OnoGragh data to identify the probability of country-of-origin for each name. OnoGraph
is a database containing more than 4 billion name-place relations based on pre-processed census
data and has been used by major institutions such as the Federal Reserve. This approach results in
a more complete sample with more accurate matching of cultural heritage, which is useful for
future studies on the cultural heritage of corporate leaders and directors.
The rest of the paper is organized as follows. In Section II, we review relevant literature,
provide institutional background, and develop our hypothesis. Section III describes the data and
our sample construction. Section IV presents the empirical design and results. Section V discusses
additional test results and Section VI concludes.
II. PRIOR LITERATURE AND HYPOTHESES
2.1 Prior Literature
2.1.1 CEO cultural heritage and director ethnic characteristics
CEO cultural heritage is a developing area of research. Pan, Siegel and Wang (2020) use
the last names of CEOs and immigrant arrival records to identify the ancestry of CEOs and

examine uncertainty avoidance. They find that CEOs with a more uncertainty-avoiding cultural
heritage are less likely to engage in acquisitions. Nguyen, Hagendorff and Eshraghi (2018) use
family trees to identify bank CEOs’ country of origin and find that banks led by CEOs whose
parents are immigrants perform better when facing increased competition due to liberalization of
interstate branching. Hagendorff, Liu and Nguyen (2021) also use family trees to identify a CEO’s
cultural heritage and study its impact on the CEO’s overconfidence and acquisition performance.
They find that CEOs are more prone to overconfidence if the culture in their ancestral country of
origin is characterized by strong individualism, independence, long-term orientation, and
inequality.
Boards are tasked with approving important corporate decisions and evaluating the CEO.
Prior research has examined effects of board expertise, shareholder dissent, networks, and political
connections. Bai and Krishnan (2015) find that hospitals without physician participation on their
boards of directors deliver lower quality of care. Ertimur, Ferri and Oesch (2018) examine effects
of shareholder voting on directors and find that shareholders use their votes in uncontested director
elections to get directors to address specific problems, rather than to vote them onto or off of the
board. Larcker, So and Wang (2013) document that directors’ network affects information
exchange and firm performance, as firms with well-connected boards of directors earn superior
risk-adjusted stock returns.
There is also a growing literature on director ethnic characteristics which finds mixed
effects of ethnic diversity among the directors. For instance, Bernile, Bhagwat and Yonker (2018)
find that greater board diversity leads to lower firm risk and more innovation whereas Guest (2019)
finds no evidence that board ethnic diversity is associated with stronger monitoring outcomes.
However, directors and CEOs may not work in silos. CEOs may have substantial influence over

the board composition as they gain more bargaining power (Hermalin and Weisbach 1998). Given
the importance of the CEO-board dynamic, it is surprising that little is known about the cultural
proximity between directors and their CEOs.
2.1.2 The importance of cultural proximity
The social psychology literature has documented that cultural proximity significantly
affects interpersonal relationships and communication. People who share the same cultural
background are more likely to have strong social ties and form friendships, a phenomenon known
as homophily. It is well documented that similarity attracts (McPherson, Smith-Lovin and Cook
2001). Cultural similarity also has been shown to facilitate information sharing and communication.
For example, analyst forecasts are more accurate if the cultural distance between analysts and the
CEO is smaller (Frijns and Garel 2021).
The role of cultural proximity in corporate settings has received growing attention. Van
den Steen (2010) analytically emphasizes the importance of shared values and beliefs in enhancing
communication and collaboration and creating synergy. Karolyi (2016) reviews the role of cultural
differences in explaining the foreign bias puzzle in investments and calls for more research on
cultural proximity in finance. Prior literature has mainly focused on cross-country cultural
differences. For example, Grinblatt and Keloharju (2001) show that investors of Finnish firms are
more likely to hold, buy, and sell stocks if the CEOs are from the same cultural background.
Cultural differences at the country level affect multinational firm operations (Schwartz 2014) and
cross-border M&A returns and volume (Ahern, Daminelli and Fracassi 2015; Lim, Makhija and
Shenkar 2016).1 Brochet, Naranjo and Yu (2016) find language barriers between speakers and
1
Our study differs from the studies on cross-border M&A in several ways. First, we focus on the cultural proximity
between the CEO and the board in the acquirer firm, while studies on cross-border M&A focus on the cultural
proximity between the target firm and the acquirer firm. Second, we focus on the M&As in the United States, thus

listeners in conference calls affect disclosure transparency for non-U.S. firms. Although these
findings suggest a role of cultural proximity in disclosure, there is little systematic evidence on
how cultural proximity between the CEO and directors is related to CEO-board dynamics.
2.2 Hypothesis Development
2.2.1 Dynamic CEO-board cultural proximity
The social psychology literature has documented that cultural proximity significantly
affects interpersonal relationships and communication. People who share the same cultural
background are more likely to have strong social ties and form friendships, a phenomenon known
as homophily (McPherson, Smith-Lovin, and Cook 2001). Directors with similar cultural
backgrounds as their CEOs are more likely to belong to the same club and form personal
relationships with the CEOs (Broome, Conley and Krawiec 2010). Ferreira (2010) provides
evidence that CEOs prefer directors who are similar to themselves.
CEOs can exert influence on board composition. Shivdasani and Yermack (1999) find that
CEOs are frequently involved in the director selection process. We posit that cultural proximity
between the CEO and directors can shape CEO-board dynamics through implicit bias and may
evolve over CEO tenure.2 Given that CEOs tend to gain bargaining power over a longer tenure and
can exert greater influence over the board, we expect that cultural proximity between CEOs and
directors may grow over a CEO’s tenure. Therefore, we expect that, as a CEO’s tenure increases,
there will be more directors who are culturally similar to the CEO. We hypothesize:
H1: The CEO-board cultural proximity increases over the years after CEO transition.
2.2.2 CEO-board cultural proximity and decision-making
holding the country fixed and mitigating the confounding effects of differences in legal systems, institutions, business
environments, etc.
2
Implicit bias describes the unconscious, automatic, and/or involuntary attitudes that can influence people’s emotions,
behaviors, and thinking patterns.

The importance of cultural proximity in the corporate context is widely acknowledged in
academia (Van den Steen 2010; Guiso, Sapienza and Zingales 2015; Cai 2022). However, CEO-
board cultural proximity’s impact on strategic decision-making efficiency is ambiguous.
On one hand, CEO-board cultural proximity might be associated with better strategic
decision-making through improved coordination and communication. People who share similar
cultural values coordinate better and have less information collection cost (Van den Steen 2010).
Indeed, similarity in cultural background serves as a substitute for explicit communication due to
similar hidden assumptions and group norms (McDonald and Gandz 1992; Crémer 1993; O’Reilly
1989; Kreps and Shepsle 1996; Hermalin and Weisbach 2003; Baker and Gompers 2003).3 CEOs
who share similar cultural backgrounds with directors may also experience a smaller threat of
dismissal and therefore communicate more freely with the directors. 4 High CEO-board cultural
proximity could thus be associated with better communication between the CEO and the board.
The CEO and the board need to communicate and collaborate frequently to make strategic plans.
Therefore, greater cultural proximity between the CEO and the board of directors might improve
the company’s strategic decision-making by enhancing their coordination.
On the other hand, similarity in cultural backgrounds between CEO and directors may also
have a dark side. Directors who share similar cultural backgrounds with the CEO are more prone
3
For example, authority and decision making varies with different cultures. Different cultures interpret differently
behaviors such as calling the boss by their first name and contradicting the boss. For example, Scandinavian cultures,
like Sweden, with flatter hierarchy emphasize a consensual decision-making process. In more hierarchical cultures
such as Japan it is common to formally address the boss and give the boss a special seat. “Asian Americans are
perceived to work hard, be law-abiding and fiscally conservative, focus on and make sacrifices for their children’s
education, and have imbedded cultural norms to accept subordinate positions and defer to higher authority. Often cited
is the proverb used in several East Asian cultures, ‘The nail that sticks out gets hammered down,’ to explain Asian
Americans not drawing attention to themselves or vocalizing dissent.” (Chia 2020).
4
Minority employees face difficulty with building workplace relationships across racial boundaries. For example, the
ethnicity of African Americans plays a role in the discomfort of “opening up” and socializing at work. One African
American female asked, “What am I supposed to say in these social networking settings? How do I jump into the
conversation when I often have no idea what they are talking about? I don’t watch the same TV shows or the sports
they are discussing” (Phillips, Dumas and Rothbard 2018).
10

to “groupthink” (Janis 1972), which makes them avoid conflict and quickly accede to decisions
without critical evaluation. Specifically, groupthink occurs within a group of people in which the
desire to avoid conflict or conformity in the group results in an irrational or dysfunctional decision-
making outcome. The desire for harmony in a group may lead to a tendency among its members
to agree at all costs. This causes the group to minimize conflict and reach a consensus decision
without critical evaluation. Jensen (1993) argues that one important source of board failure is when
board culture discourages conflict. There is ample anecdotal evidence that directors are reluctant
to disagree with and confront the CEO. One prominent example of such board failure is Enron’s
board (O'Connor 2002). Enron’s board members all had similar cultural backgrounds with
Kenneth Lay, the CEO of Enron. Therefore, the group was unlikely to challenge the dominant
long-standing chairman to whom it owed so much and, as a result, Lay had created an environment
that became a breeding ground for groupthink (Winterton, H., September 2020). The board thus
may have more allegiance to the CEO (Guest 2019) and are more likely to belong to the “old boys
club” (Hillman, Cannella and Harris 2002; Zweigenhaft and Domhoff 2018). Moreover, directors
who have similar preferences as the CEO’s may behave in a manner that is misaligned with the
interests of shareholders (Adams and Ferreira 2007; Baldenius, Meng and Qiu 2019). Glover and
Kim (2021) predict that diverse teams with sufficient team tenure have an advantage in providing
incentives for mutual monitoring and preventing collusion. Therefore, the cultural proximity
between the CEO and the board of directors might harm the company’s strategic decision-making
by exacerbating groupthink.
Considering the opposing effects of CEO-board cultural proximity on strategic decision-
making through coordination and groupthink, we hypothesize:
H2: A greater CEO-board cultural proximity is not associated with the quality of
strategic decision-making.
11

III. DATA AND SAMPLE CONSTRUCTION
3.1 CEOs’ and Directors’ Cultural Heritage Data
Using novel datasets, we construct a comprehensive sample of the cultural heritage of
CEOs and directors from S&P 1500 companies from 2007 to 2019. 5 We start with the ISS
Directors and Standard & Poor’s ExecuComp datasets. The sample period starts in 2007 because
ISS changed its data collection process in 2007, resulting in incomparable variables before and
after the change. We then identify the cultural heritage of the CEOs and directors in the sample.
Following Mateos (2007), we identify the cultural heritage of CEOs and directors through their
names. We obtain the first names and last names of CEOs and directors from ISS Directors and
ExecuComp, resulting in 30,640 unique pairs of first and last names. To trace the heritage of CEOs
and directors, we use OnoGragh to identify the probability of country-of-origin for each name.
OnoGraph is a database containing more than 4 billion name-place relations based on pre-
processed census data, which has been used by major institutions such as the Federal Reserve.
OnoGraph is built on the largest private database of living people, containing 30 million forenames
and 31 million surnames from 241 countries and jurisdictions. 6 Different from previous studies
5
It is generally challenging to trace the cultural heritage of corporate leaders. One novel study by Pan, Siegel, and
Wang (2020) uses New York Port arrival data to identify the heritage of CEOs. To obtain a valid country of origin,
their method requires that the CEOs’ ancestors arrive at the New York port during a specific period (between 1820
and 1957). Nguyen, Hagendorff and Eshraghi (2018) use census records to manually identify family trees of CEOs.
They restrict their sample to CEOs whose paternal and maternal ancestors originate from the same country and migrate
to the U.S. at similar times. For CEOs born after 1940, only 56% of the sample can be identified with a cultural
heritage.
6
Ellahie, Tahoun and Tuna (2017) use OnoMAP to attribute an ethnicity to a CEO based on his/her forename and
surname. OnoMAP was originally developed in 2009 by researchers at the Department of Geography of University
College London. However, OnoGraph might outperform OnoMAP for the following reasons. First, OnoGraph covers
a larger set of name-place relations than OnoMAP. Specifically, OnoMAP covers 500 thousand forenames and 1
million surnames drawn from public name registries of 28 countries, while OnoGraph is built on the largest private
database of living people which contains 30 million forenames and 31 million surnames from 241 countries and
jurisdictions, resulting in a coverage of more than 4 billion name-place relations. Second, OnoMAP assigns to a CEO
the discrete ethnicity with the highest probability, while OnoGraph assigns a continuous probability distribution over
different ethnicities, which is a more comprehensive reflection of the person’s cultural heritage. Due to the discrete
12

which rely on discrete ethnicity/country measures, we construct a continuous measure of cultural
heritage that arguably captures a CEO/director’s origin in a more complete manner. For example,
a CEO can be 80% Italian, 15% French, and 5% British. This is particularly important because
previous studies have struggled to take multi-country origin into account. For example, because
different cultural heritage from parents is difficult to account for, Nguyen, Hagendorff and
Eshraghi (2018) require CEOs whose paternal and maternal ancestors originate from the same
country and migrate to the U.S. around similar times. For each name, OnoGraph provides the
probabilities of each possible country of origin. We drop the unrepresentative countries of origin
if the probability is below 2% to reduce measurement noise.
Our measure of CEO-board cultural proximity has three advantages in identifying the
CEO/director’s cultural backgrounds. First, our measure can preserve a person’s ethnic and
cultural origin to a greater extent than prior measures. A notable feature of our measure is that we
exploit both the first name and last name of a CEO or director to identify her country of origin
instead of solely basing the measure on last names (e.g., Nguyen, Hagendorff and Eshraghi 2018;
Hagendorff, Liu and Nguyen 2021). For example, if a CEO has a Russian first name and an Italian
last name, she will be identified as Russian-Italian using our method. However, in previous
literature where only last names are used, she will be identified as Italian, neglecting her Russian
origin. As discussed in Pan, Siegel, and Wang (2020), a first name associated with her original
country reflects her parents’ investments in the within family transmission of cultural heritage,
which is the dominant channel of cultural heritage transmission. Using both first names and last
names enables us to capture this choice of cultural identity, thereby measuring a person’s cultural
ethnicity assignment, Ellahie, Tahoun and Tuna (2017) also have to remove those observations where OnoMAP
delivers different ethnicity classifications using the first name and the last name, which results in further sample size
drop.
13

heritage more accurately. Second, our measure is more convenient than measures not based on
OnoMAP or OnoGraph and enables us to identify a larger sample of CEOs’ and directors’
countries of origin. We neither require that a CEO’s or director’s ancestor arrived in the port of
New York during a certain period (Pan, Siegel and Wang 2020) nor that the CEO’s or director’s
parents have the same country of origin (Nguyen, Hagendorff and Eshraghi 2018) to have valid
country-of-origin data. As long as we have a CEO or director’s first name and last name, we can
identify her country of origin. Third, the advantage of the algorithm of OnoGraph (and OnoMAP
before it) allows us to include in our sample CEOs and directors who are not immigrants to the
US, which greatly enlarges the sample size.
Figure 1 illustrates the country heritage distribution of the CEOs and directors in S&P 1500
firms. CEOs and directors are most likely to originate from the United States, Canada, Germany,
France, Australia, India, and Brazil.
[Insert Figure 1 here]
3.2 CEO-Board Cultural Proximity
The measure of CEO-board cultural proximity is based on the similarity in culture values
between the CEO and her directors. We adopt the Hofstede (2001) national culture model to
measure a person’s cultural values based on her country of origin.7 Hofstede's cultural dimensions
theory is a framework for cross-cultural communication. Hofstede developed his original model
by performing factor analysis on the results of a worldwide survey of IBM employees between
1967 and 1973. The original model proposed four dimensions along which cultural values could
7
Hofstede’s cultural dimensions theory is probably the most well-known national culture framework, with over 70
thousand citations to the original development of this theory, Culture's consequences: International differences in
work-related values, and over 50 thousand citations to its later version, Cultures and Organizations: Software of the
mind.
14

be analyzed: individualism vs collectivism (IDV); uncertainty avoidance (UAI); power distance
(PDI), and masculinity vs femininity (MAS). Specifically, IDV measures the society’s preference
for a loosely-knit social framework where individuals are expected to take care of only themselves
and their immediate families. UAI expresses the degree to which the members of a society feel
uncomfortable with uncertainty and ambiguity. PDI expresses the degree to which the less
powerful members of a society accept and expect that power is distributed unequally. MAS
represents a preference for achievement, heroism, assertiveness, and material rewards for success.
The dataset on Hofstede model of national culture contains indices of the culture dimensions in
101 countries or regions. The larger the index is, the more importance is attached to the culture
dimension in the country/region.
Our sample consists of 19,534 unique names. A company’s CEO-Board cultural proximity
is calculated as the average of all pairs of CEO-director cultural proximities. Specifically, a
person’s score for each of the Hofstede culture characteristics is the weighted average of the
indices of all countries/jurisdictions they could be from. The cultural proximity between the CEO
and each director is the sum of the absolute differences along all cultural dimensions between the
CEO and the director times minus one. The CEO-board cultural proximity is then given by the
average CEO-director cultural proximity of all CEO-director pairs for a given firm and year. We
standardize the distribution of CEO-board cultural proximity to enable easier interpretations. A
higher value of CEO-board cultural proximity indicates that the CEO and the board of directors
are more culturally similar. We provide a detailed example of calculating CEO-board cultural
proximity in Appendix A.
To further validate our measure, we compare our measure of cultural heritage with that of
Pan, Siegel and Wang (2020). Since they use only last name while we use both last name and first
15

name, we first compute the average cultural heritage measure for each last name for all
corresponding first names. There are 15,803 unique last names in our sample and 15,373 unique
last names in the dataset of Pan, Siegel and Wang (2020), of which 6,847 of them are the same,
accounting for 43% of our sample and 45% of their sample. For each common last name, we
compare our measure of cultural heritage with that of Pan, Siegel and Wang (2020). 8 The
dissimilarity ratio of the power distance distributions is 0.0119, and the dissimilarity ratio of
individualism distributions is 0.0070. 9 The results indicate that, in the common sample, our
measure of cultural heritage is similar to that of Pan, Siegel and Wang (2020).
3.3 Data on Board of Directors, CEOs and Firm Characteristics
We obtain data on board of directors from ISS (formerly RiskMetrics) Directors, which
contains directors from S&P 1500 firms from 2007 to 2019. There are 24,930 directors in this
sample period, among which 22,489 directors have valid cultural heritage data. Data on CEOs are
obtained from the Annual Compensation dataset in Execucomp. There are 4,984 CEOs in this
sample period, of which 4,850 CEOs have valid cultural heritage data. We then merge the data on
directors with the data on CEOs, reducing the sample to 1,903 companies and 15,128 firm-year
observations. We subsequently merge the data with Compustat and CRSP to obtain firm
characteristics such as firm size and financial performance, and we drop the observations with
invalid asset data or missing CEO tenure, resulting in a final sample of 1,875 companies and
14,670 firm-year observations.
All variables are defined in Appendix B. Table 1 presents the descriptive statistics of these
variables. The cultural proximity between a CEO and her board has a mean of zero and a standard
8
Due to data availability, we only compare the first two dimensions of culture, i.e., power distance and individualism.
9
The dissimilarity ratio equals one minus the overlapping coefficient, where the overlapping coefficient is a measure
of the agreement between two distributions or the area under two probability (density) functions simultaneously
(Bradley 1985, pp. 546).
16

deviation of one because its distribution is standardized. The median board has nine directors. The
average director age is 62 and average director tenure is nine years. Table 2 reports the correlations
between the variables. The results indicate that the cultural proximity between the CEO and the
board increases with CEO tenure, and is often larger for firms whose CEO also serves as the board
chair.
Figure 2 shows that the CEO-board cultural proximity increases over a CEO’s tenure,
which is consistent with the theoretical prediction made by Hermanlin and Weisbach (1998) and
sociological theories such as homophily (McPherson, Smith-Lovin, and Cook 2001). This upward
trend suggests that, as a CEO stays longer in the job, the board of directors becomes more culturally
similar to their CEO.
[Insert Tables 1 and 2 and Figure 2 here]
IV. RESEARCH DESIGN AND RESULTS
4.1 Dynamic CEO-Board Cultural Proximity Over the Years After CEO Turnover
We start our analysis to formally examine how CEO-board cultural proximity dynamically
evolves over the years after a CEO turnover by estimating the following equation:
CEO-Board Cultural Proximity 𝑖𝑡 = 𝛽0 + 𝛽1 # Years Post CEO Turnover𝑖𝑡
+𝑋𝑖𝑡 ′ 𝛾 + 𝛼𝑖 + 𝜆𝑡 + 𝜀𝑖𝑡 (1)
where CEO-Board Cultural Proximity 𝑖𝑡 is the CEO-board cultural proximity defined in section
3.2 for firm 𝑖 in year t; # 𝑌𝑒𝑎𝑟𝑠 𝑃𝑜𝑠𝑡 𝐶𝐸𝑂 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 is the number of years for which the CEO
has been chief executive in firm i as of year t; 𝑋𝑖𝑡 is a set of control variables for corporate
governance and firm characteristics. At the board level, we control for the number of directors on
the board (Board Size), the fraction of female directors on the board (% Female Directors), the
17

fraction of busy directors on the board, i.e., directors with at least three board seats (% Busy
Directors), the fraction of financial experts on the board (% Financial Experts), average director
age (Average Director Age), average director tenure (Average Director Tenure), and whether the
CEO is also the board chair (CEO Duality).10 At the firm level, we control for firm size (Firm
Size), ROA (ROA), and annual stock return volatility (Annual Volatility). We control for these
time-varying firm characteristics to mitigate the concern that board independence may be
correlated with other aspects of board structure, the complexity of operations, firm performance,
and firm risk. In addition, to mitigate the concern that our results are driven by unobservable time-
invariant firm characteristics and time-specific shocks, we include firm fixed effects (𝛼𝑖 ) and year
fixed effects (𝜆𝑡 ). Standard errors (𝜀𝑖𝑡 ) are clustered at the firm level. This is to ensure that our
within-firm test results are not explained by time-invariant unobserved factors such as corporate
culture or local labor market conditions. The main variable of interest is
# 𝑌𝑒𝑎𝑟𝑠 𝑃𝑜𝑠𝑡 𝐶𝐸𝑂 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 .
Table 3 reports the estimation results for equation (1). The results show a significantly
positive coefficient on # 𝑌𝑒𝑎𝑟𝑠 𝑃𝑜𝑠𝑡 𝐶𝐸𝑂 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 , indicating that CEO-board cultural
proximity significantly increases over the new CEO’s tenure. Specifically, as the number of years
post CEO turnover increase by one year, CEO-board cultural proximity increases by 0.6% of the
standard deviation of the proximity measure’s distribution. The economic magnitude is meaningful:
over a six-year CEO’s tenure, the CEO-board cultural proximity increases by 16% of the sample
median (calculated as 0.006*6/0.223).
[Insert Table 3 here]
10
Graham, Kim and Leary (2020) documented an increase in chairman duality after SOX, which is interpreted as a
substitute for board non-independence. To mitigate the concern that our CEO-board cultural proximity does not
provide additional explanatory power to CEO duality, we control for whether CEO also acts as chairman.
18

4.2 Year-By-Year Evolution of CEO-Board Cultural Proximity After CEO Turnover
To further explore how CEO-board cultural proximity evolves year by year after a CEO
turnover event, we estimate the following equation:
CEO-Board Cultural Proximity 𝑖𝑡 = 𝛽0 + ∑𝑇𝑘=1 𝛽𝑘 𝑑𝑖𝑡

𝑘
+ 𝑋𝑖𝑡 ′ 𝛾 + 𝛼𝑖 + 𝜆𝑡 + 𝜀𝑖𝑡 (2)
In equation (2), we re-estimate equation (1) by replacing the continuous variable of CEO tenure
𝑘
with dummy variables for each year of CEO tenure. Specifically, 𝑑𝑖𝑡 is an indicator variable equal
to one if # 𝑌𝑒𝑎𝑟𝑠 𝑃𝑜𝑠𝑡 𝐶𝐸𝑂 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑖𝑡 equals k in year t, and to zero otherwise. We expect all
𝛽𝑘 to be significantly positive and to become larger (or at least not significantly smaller) as k
increases. 𝑋𝑖𝑡 represents a set of control variables for firm and board characteristics. We also
include firm and year fixed effects. The baseline is the year when CEO turnover occurs.
The results are presented in Table 4, and indicate that CEO-board cultural proximity
significantly increases in each year after the CEO turnover. Specifically, compared with the year
when the new CEO initially assumed the position, the CEO-board cultural proximity increases by
11.5% of the standard deviation of the measure’s distribution by the end of her third year, and by
13.9% of the standard deviation of the measure’s distribution by the end of her sixth year. 11 Since
there are some extremely long CEO tenures (the maximum of CEO Tenure is 61 years), we group
together CEO tenures longer than 9 years. The results are consistent if we group together CEO
tenures longer than 8 or 10 years. Our results suggest that CEO-board cultural proximity
significantly increases in each year following the CEO turnover event. CEO-board cultural
11
The magnitude of the coefficients in Table 4 are greater in comparison with Table 3 for two reasons. First, the
coefficient of Year n Post CEO Turnover (n=1,2,3...) in Table 4 estimates the change in CEO-board cultural proximity
from Year 0 to Year n, which encompasses an n-year change (n=1,2,3...). However, the coefficient of # Years Post
CEO Turnover in Table 3 estimates the average one-year change in CEO-board cultural proximity. Second, since
CEO-board cultural proximity shifts rapidly in the initial years following CEO turnover followed by steady increases
thereafter, the coefficient of # Years Post CEO Turnover is expected to be smaller than that of Year 1 Post CEO
Turnover since the former is an average of all years following the CEO turnover event.
19

proximity experiences a sharp increase in the new CEO's first year and continues to rise steadily
thereafter. The cumulative increase in CEO-board cultural proximity in the new CEO’s first eight
years doubles the initial increase that occurred right after the CEO turnover. Figure 3 plots the
estimated coefficients of each of the CEO tenure year indicator variables in Table 4 and their
respective confidence intervals.
[Insert Table 4 and Figure 3 here]
4.3 Dynamic CEO-Board Cultural Proximity After Exogenous CEO Turnover
An alternative explanation for the finding in section 4.1 that CEO-board cultural proximity
increases over the years after a CEO turnover event is that an omitted factor drives both the CEO
turnover and CEO-board cultural proximity. For example, if a company decides to expand its
market share among customers with a certain ethnic origin, it is possible that a new CEO with that
ethnic origin is more likely to be appointed, and directors with that ethnic origin are also more
likely to be elected thereafter. To mitigate this concern, we restrict our sample to exogenous CEO
turnovers. To identify exogenous CEO turnovers, we hand collect the departure reason for each
CEO turnover event. Specifically, we search the press releases for each CEO turnover event, and
categorize the turnover reason into one of the following eight categories: (1) announced retirement;
(2) death; (3) poor health; (4) replacement due to conflicting views, poor performance, or
misconduct; (5) take another position; (6) bankruptcy; (7) M&A; or (8) other. For the announced
retirement category, we also record the CEO’s age at retirement. Exogenous CEO turnover refers
to CEO turnover events due to the prior CEO’s death, poor health, or natural retirement when the
prior CEO was at least 63 years old (Intintoli, Serfling and Shaikh 2017). We then re-estimate
equation (1) using exogenous CEO turnovers.
20

The results are reported in Table 5, and suggest that CEO-board cultural proximity still
increases over the years after an exogenous CEO turnover, thus mitigating the above concern. As
the number of years after an exogenous CEO turnover increases by one, CEO-board cultural
proximity increases by 14.2 % of the standard deviation of the proximity measure’s distribution.12
[Insert Table 5]
4.4 Is CEO-Board Cultural Proximity Capturing the Effect of CEO-Director Networks?
In previous section, we find that CEO-board cultural proximity increases over the years
after a new CEO joins the company. Rather than reflecting a CEO’s preference that new directors
be more culturally proximate to herself, the change over time in our measure of CEO-board cultural
proximity might be solely capturing effects due to a CEO’s preference for new directors to be part
of the CEO’s network of connections.
To mitigate this concern, we first identify CEO-director connections through current or
prior employment using the Individual Networks dataset from BoardEx. In our sample, there are
1,575 pairs of CEO-director connections through current or prior employment. We then construct
two variables to measure the intensity of CEO-director network within a firm: # Connected
Directorsi,t is the number of directors who had at least one past or current connection with the CEO
of firm i in year t, and % Connected Directorsi,t is the fraction of connected directors on the board
(# Connected Directorsi,t divided by the number of all directors on the board of firm i in year t).
To demonstrate that our measure of CEO-board cultural proximity cannot be solely
represented by CEO-director connections, we conduct three robustness tests. First, we include
CEO-director network as an additional control variable and re-estimate equation (1). The results
12
The economic magnitude of #Years Post CEO Turnover is larger in Table 5 than in Table 3. This is probably because
the sample for Table 5 includes only the new CEOs who assume office during our sample period and excludes the
CEOs with extremely long tenures.
21

are reported in Panel A of Table 6. Columns 1 uses # Connected Directorsi,t to measure CEO-
director network and column 2 uses % Connected Directorsi,t. In all columns, the coefficients on
# Years Post CEO Turnover remain statistically and quantitatively similar to our prior estimates.
Second, we replace CEO-Board Cultural Proximity 𝑖𝑡 with its residual after being
regressed on CEO-director network and a set of control variables and fixed effects. Specifically,
we first estimate the following equation:
CEO-Board Cultural Proximity 𝑖𝑡 = 𝛽0 + 𝛽1 Network𝑖𝑡 + 𝑋𝑖𝑡 ′ 𝛾 + 𝛼𝑖 + 𝜆𝑡 + 𝜔𝑖𝑡 (3)
where Network𝑖𝑡 takes the value of either # Connected Directorsi,t or % Connected Directorsi,t; 𝑋𝑖𝑡
is the same set of control variables as that of equation (1); 𝛼𝑖 are firm fixed effects and 𝜆𝑡 are year
fixed effects. We then replace CEO-board cultural proximity with the residual 𝜔𝑖𝑡 from equation
(3) and re-estimate equation (1). This residual, by construction, is orthogonal to CEO-director
network and thus captures the additional explanatory power of CEO-board cultural proximity. The
results are provided in Panel B of Table 6. In all columns, the coefficients on # Years Post CEO
Turnover remain quantitatively and statistically similar to those from estimating equation (1).
Third, we replace CEO-board cultural proximity with CEO-director network and re-
estimate equation (1). The results are provided in Panel C of Table 6. If our results are mainly
driven by the effect of CEO-director network, then the coefficient on # Years Post CEO Turnover
should be quantitively and statistically similar to that from our estimation of equation (1). We do
not, however, find significantly positive coefficients on # Years Post CEO Turnover in any of the
specifications.
Taken together, these results mitigate the concern that our findings on the dynamics of
CEO-board cultural proximity are driven by the effect of CEO-director networks, suggesting that
our measure of CEO-board cultural proximity is unlikely to capture only the existing CEO-director
22

network. Rather our initial results appear to reflect the CEO’s preference for natural closeness
between the CEO and a director due to their similar cultural backgrounds. This is also consistent
with the sociology literature on homophily: people with similar backgrounds more easily bond and
form relationships with each other than with dissimilar people (McPherson, Smith-Lovin and Cook
2001).
4.5 Potential Mechanisms: CEO Power or Entrenchment
To shed light on the underlying channels, we test whether CEO-board dynamics evolve
differently depending on a CEO’s bargaining power. We consider two channels that can potentially
explain the increase in CEO-board cultural proximity over CEO tenure. The CEO power channel
as in Hermalin and Weisbach (1998) suggests that uncertainty about the CEO’s ability decreases
as a capable CEO stays longer on the job. Theory also indicates that high-ability (successful) CEOs
gain more bargaining power as their tenure increases and can therefore influence the board
composition to a greater extent (Hermalin and Weisbach 1998; Baldenius, Melumad, and Meng
2014). Alternatively, the entrenchment channel as in Bebchuk and Fried (2004) predicts that low
ability (mediocre) CEOs entrench themselves and inefficiently gain excess power over the board.
We use CEO success and CEO ownership to measure CEO bargaining power. First, in line
with the literature (e.g., Rajgopal, Shevlin, and Zamora 2006), we measure CEO success using the
CEO’s ROA performance compared with the firm’s industry peers. Specifically, a CEO is
classified as successful if the average ROA over her entire tenure is above the industry average
ROA. If the average ROA is below the industry average, they are classified as mediocre. We then
split the sample based on CEO success and re-estimate equation (1) in each of the two subsamples.
Second, we follow prior literature to examine large shareholdings by the CEO as another source
23

of CEO power (Berger, Ofek and Yermack 1997). A CEO is classified as a large shareholder if
she owns over 5% of the firm’s outstanding shares. This threshold is based on Section 13(d) of the
Securities Exchange Act of 1934, which requires any individual or entity that acquires beneficial
ownership of more than 5% of a class of registered securities to file a Schedule 13D or Schedule
13G form with the SEC.13 We then split the sample based on CEO ownership and re-estimate
equation (1) in each of the two subsamples.
The results are reported in Table 7. Panel A examines the cross-sectional effect of CEO
success. Column 1 uses the subsample of successful CEOs while column 2 uses the subsample of
mediocre CEOs. The p-value for the difference in the coefficients on # Years Post CEO Turnover
from Fisher’s permutation test is 0.05, indicating that the dynamic increase in CEO-board cultural
proximity is significantly stronger for successful CEOs. That is, successful CEOs may have more
discretion to select directors who are culturally similar to them. Panel B examines the cross-
sectional effect of CEO ownership. Column 1 uses the subsample of large shareholder CEOs while
column 2 uses the subsample of non-large shareholder CEOs. 14 , 15 The results show that the
dynamic change in CEO-board culture proximity after a new CEO assumes office is larger and
more significant for large shareholder CEOs. Taken together, these findings suggest that the CEO-
Board cultural proximity dynamic is consistent with increased CEO bargaining power as predicted
by Hermalin and Weisbach (1998).
13
The results are consistent if we use the 90th percentile of CEO ownership (4.592%) as the threshold. The results are
also consistent if we only compare the CEOs whose ownership is in the top 10% with the CEOs whose ownership is
in the bottom 10%.
14
Since less than 10% of CEOs owns over 5% of her company’s outstanding shares, the size of the large shareholder
CEO subsample is much smaller than the size of the non-large shareholder CEO subsample. We encountered
conformability error when performing Fisher’s permutation test to test the equality of the two coefficients on CEO
Tenure, which might be due to the large difference in subsample size.
15
Descriptive data shows that large shareholder CEOs on average have longer tenure (18.5 years) than non-large-
shareholder CEOs (6.9 years).
24

4.6 CEO-Board Cultural Proximity and Strategic Decision-Making
To test whether CEO-board cultural proximity is associated with corporate strategic
decision-making (H2), we focus on one of the most important corporate strategies, M&A. 16 Prior
studies have examined how different CEO characteristics or different board characteristics may
affect M&A performance. For example, El-Khatib, Fogel and Jandik (2015) find that M&A deals
initiated by CEOs with high network centrality carry greater value losses than deals initiated by
low-centrality CEOs. Li and Srinivasan (2011) document that stock returns around M&A
announcements are higher in firms whose founder is a director (founder-director firm) than in non-
founder-director firms. However, we focus on how the interplay of CEO characteristics and board
characteristics, namely the proximity between the CEO’s cultural heritage and directors’ cultural
heritage, affect the firm’s M&A performance. Specifically, we estimate the following equation:
CAR𝑖𝑡 = 𝛽0 + 𝛽1 CEO-Board Cultural Proximity𝑖𝑡 + 𝑋𝑖𝑡 ′ 𝛾 + 𝛼𝑖 + 𝜆𝑡 + 𝜀𝑖𝑡 (4a)
where CAR𝑖𝑡 is the [-3,3] window cumulative abnormal return around the M&A of firm i in year
t; CEO-Board Cultural Proximity𝑖𝑡 is the CEO-board cultural proximity defined in section 3.2;
and 𝑋𝑖𝑡 represents the same set of control variables as in equations (1) and (2). We also include
firm fixed effects 𝛼𝑖 and year fixed effects 𝜆𝑡 and cluster standard errors at the firm level.
The results are reported in Table 7. Column 1 uses value-weighted CAR as the dependent
variable. Column 2 uses equal-weighted CAR. The findings indicate that a one standard deviation
increase in CEO-board cultural proximity is associated with a 0.9% increase in value-weighted
CAR, which is approximately 15% of its standard deviation. The results are consistent with higher
16
In untabulated tests, we focus on corporate innovation as an important strategic decision, and use the number of
publications of firm i in year t as the outcome. We find that the relationship between CEO-board cultural proximity
and corporate innovation outcome is insignificant.
25

CEO-board cultural proximity being, on average, associated with better corporate strategic
decision-making efficiency, as proxied by M&A performance.
V. ADDITIONAL TESTS
5.1 Cross-Sectional Analysis on Corporate Governance
In this section, we examine when groupthink potentially plays a more important role. With
improved communication due to cultural proximity, the board of directors is also less likely to
challenge and confront the CEO when the firm has weak corporate governance (Hazarika, Karpoff
and Nahata 2012). Following Bebchuk, Cohen and Ferrell (2009), we measure a firm’s governance
quality using the E-index, which covers six entrenchment provisions including staggered boards,
limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority
requirements for mergers and charter amendments. We obtain E-index data from the GMI
Takeover Defense dataset. A firm is classified as having weak corporate governance if its E-index
is greater than the sample median, which is 2, and as having strong corporate governance if its E-
index is less than or equal to the sample median. We then split the sample based on corporate
governance quality and re-estimate equation (4) in each of the two subsamples.
The results are reported in Table 9. Columns 1 and 3 (2 and 4) use the subsample of weak
governance (strong governance) firms. 17 The results show that in firms with weak corporate
governance, higher CEO-board cultural proximity is associated with worse corporate strategic
decision making, suggesting that the groupthink channel dominates the coordination channel in
17
The size of the “strong governance” subsample is larger than that of the “weak governance” subsample because E-
index is not a continuous variable. The median and 70th percentile of E-index are both 2, which means that firms with
an E-index less than or equal to 2 accounts for over 70% of the all firms with non-missing M&A performance.
26

this situation. Taken together, the findings imply that CEO-board cultural proximity may not
always be associated with better corporate strategic decision making. Under certain conditions,
such as when the firm has weak corporate governance, cultural proximity may exacerbate
groupthink.18
VI. CONCLUSION
We propose that cultural proximity between a CEO and her directors plays a significant
role in shaping CEO-board dynamics. Using novel datasets, we measure the cultural proximity
between the CEO and directors from S&P 1500 companies. We first identify the cultural heritage
of CEOs and directors based on their first names and last names and then calculate the cultural
proximity between the CEOs and directors. CEOs have influence over director selection
(Shivdasani and Yermack, 1999) and prefer directors who are similar to themselves (Ferreira,
2010). We expect that cultural proximity between CEOs and directors may dynamically evolve
over the years after a CEO turnover event.
We find that CEO-board cultural proximity increases over CEO tenure, which is consistent
with the theoretical predictions made by Hermalin and Weisbach (1998) and social psychology
theory such as homophily (McPherson, Smith-Lovin, and Cook 2001). We show that this dynamic
evolution of CEO-board cultural proximity is robust when the CEO turnover is plausibly
exogenous. Moreover, the dynamic is not driven by existing CEO-director networks.
18
In untabulated tests, we use the number of publications of firm i in year t as the outcome to measure corporate
innovation, which is another important strategic decision of the firm. We find that the relationship between CEO-
board cultural proximity is positively associated with corporate innovation only when governance is strong. In firms
with weak corporate governance, the relationship between CEO-board cultural proximity and innovation is
insignificant.
27

We explore two potential mechanisms underlying the dynamic CEO-board cultural
proximity. The CEO-power channel (Hermalin and Weisbach,1998) predicts that CEOs who have
delivered successful performance gain more bargaining power in the director selection process,
whereas the entrenchment channel (Bebchuk and Fried, 2004) predicts that CEOs with low
abilities entrench themselves with excess control of board composition. We find our results are
mainly driven by CEOs with higher bargaining power proxied by successful performance or large
ownership of his/her company, which is consistent with the CEO-power channel. We also provide
evidence consistent with cultural proximity potentially exacerbating groupthink when corporate
governance is weak.
Our results highlight the role of cultural proximity in the corporate context, specifically,
the relationship between the CEO and the board of directors. There has been much discussion of
the importance of culture in both industry and academia, with most of the focus on cross-firm or
cross-country settings. Overall, our findings suggest that CEO-board cultural proximity plays a
significant role in shaping CEO-board dynamics.
28

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31

Appendix A: CEO-Board Cultural Proximity Example
Step 1: Identifying CEOs’/directors’ country heritage
We use OnoGragh to identify the CEOs’/Directors’ country heritage based on their first and last names.
OnoGraph is a database containing more than 4 billion name-place relations based on pre-processed census
data, which has been used by major institutions such as the Federal Reserve. OnoGraph is built on the
largest private database of living people with 30 million forenames and 31 million surnames from 241
countries and jurisdictions.
Figure A1 demonstrates one example of the process. For example, a person with last name “Chaudhary”
and first name “Syed” is 52.78% likely from India and 32.18% likely from Pakistan based on the algorithm.
For demonstration purposes, we only show a few jurisdictions in this example. In the analysis, we are able
to identify each CEO’s/director’s country heritage decomposition in a more complete manner.
Figure A1: Country/Jurisdiction Heritage Decomposition
32

Step 2: Calculating cultural proximity between the CEO and the directors
Company Name: International Bancshares Corporation; Year: 2016
International Bancshares Corporation (Nasdaq: IBOC) is a bank holding company based in Laredo,
Texas. The company's main subsidiary is International Bank of Commerce, also based in Laredo. Through
four bank subsidiaries, International Bancshares has 217 banking offices and 315 automated teller machines
serving 88 communities in the U.S. states of Texas and Oklahoma.
For year 2016, we first obtain the country/jurisdiction heritage of each CEO and director based on their first
names and last names. The heritage decomposition is shown in Table A1. For example, the CEO Dennis
Nixon is 48.35% from the United States and 11.57% from England. Of the directors, Leonardo Salinas is
21.68% from Mexico, and R. David Guerra is 18.97% from India. For demonstration purposes, we present
here only the first two main countries/jurisdictions of each CEO/director and the respective percentage for
the component.
Table A1 Country/jurisdiction heritage decomposition for the CEO and directors
Position Forename Surname juris1 prct1 juris2 prct2
CEO/Director Dennis Nixon United States 48.35 England 11.57
Director Imelda Navarro Philippines 24.82 Mexico 21.90
Director Roberto Resendez Mexico 31.44 United States 29.26
Director Leonardo Salinas Mexico 21.68 Brazil 11.44
Director Irving Greenblum United States 54.06 Mexico 19.18
Director R. David Guerra India 18.97 Brazil 14.77
Director Javier De Anda Mexico 65.74 Spain 8.11
For a given firm and year, we start with calculating the culture characteristics for each CEO/director by
weighting the Hofstede culture characteristics with the respective country heritage composition obtained in
the previous step:
𝐶𝐸𝑂(𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟) 𝐶𝑢𝑙𝑡𝑢𝑟𝑒𝑖𝑘 = ∑ 𝜔𝑖𝑐 × 𝐻𝑜𝑓𝑠𝑡𝑒𝑑𝑒 𝐶𝑢𝑙𝑡𝑢𝑟𝑒 𝑐𝑘
𝑐
where 𝑖 indicates a CEO (director), 𝑘 indicates a Hofstede culture dimension, 𝑐 indicates
country/jurisdiction origin, and 𝜔𝑖𝑐 indicates the probability of person 𝑖 originating from country 𝑐 . We
suppress the indicator for year 𝑡 for simplicity. We then calculate the cultural proximity between CEO 𝑖
with director 𝑗 as follows:
1
𝐶𝐸𝑂-𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝑃𝑟𝑜𝑥𝑖𝑚𝑖𝑡𝑦𝑖𝑗 = − ∑‖𝐶𝐸𝑂 𝐶𝑢𝑙𝑡𝑢𝑟𝑒𝑖𝑘 − 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟 𝐶𝑢𝑙𝑡𝑢𝑟𝑒𝑗𝑘 ‖
𝐾
𝑘
Finally, we calculate the CEO-board cultural proximity for firm 𝑖 by taking the average of the cultural
proximity between the CEO with each director on the board, which is given by
𝑁
1
𝐶𝐸𝑂-𝐵𝑜𝑎𝑟𝑑 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝑃𝑟𝑜𝑥𝑖𝑚𝑖𝑡𝑦𝑖 = ∑ 𝐶𝐸𝑂-𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝑃𝑟𝑜𝑥𝑖𝑚𝑖𝑡𝑦𝑖𝑗
𝑁
𝑗
Note that the 𝐶𝐸𝑂-𝐵𝑜𝑎𝑟𝑑 𝐶𝑢𝑙𝑡𝑢𝑟𝑎𝑙 𝑃𝑟𝑜𝑥𝑖𝑚𝑖𝑡𝑦𝑖 used in all regressions is standardized (by subtracting
the mean of its distribution and then dividing by the standard deviation of its distribution).
33

Appendix B: Variable Definitions
Variable Description
CEO-Board Cultural A CEO (director)’s cultural characteristic is the weighted average of
Proximity Hofstede culture indices of all countries she is probably from. For each
CEO-director pair, the cultural proximity is calculated as the absolute
difference between their weighted cultural characteristics times minus one.
The CEO-board cultural proximity is the standardized value of the average
cultural proximity across all directors for the CEO in each year. The measure
is transformed to a standardized value by subtracting the mean of its
distribution and then dividing by the standard deviation of its
distribution.
Average Director Age Average age of all directors on the board
Average Director Tenure Average tenure of all directors on the board
% Financial Experts Percent of financial expert directors on the board. Financial expert directors
are defined as those with a “Financial_Expert” indicator of “Yes” in the ISS
Directors dataset.
% Busy Directors Percent of busy directors on the board. Busy directors are defined as those
with at least three board seats (i.e., two outside board seats).
# Years Post CEO Turnover Number of years that the CEO has served as chief executive of the firm.
CEO Duality Indicator variable equal to 1 if the CEO also serves as the board chair, and
zero otherwise.
Board Size Number of directors on the board.
% Female Directors Percent of female directors on the board.
ROA Net income divided by total assets.
Firm Size Natural log of total assets.
Annual Volatility Standard deviation of twelve months’ stock returns.
Large Shareholder CEO Indicator variable equal to 1 if the percent of shares of firm i in year t owned
by its CEO is greater than or equal to 5%, and 0 otherwise.
E-index The number of the six entrenchment provisions (staggered boards, limits to
shareholder bylaw amendments, poison pills, golden parachutes, and
supermajority requirements for mergers and charter amendments).
# Connected Directors Number of directors who had at least one past or current connection with
the CEO of firm i in year t.
% Connected Directors Fraction of directors who had at least one past or current connection with
the CEO of firm i in year t.
Value-weighted CAR Value weighted [-3,+3] cumulative abnormal returns around the M&A
event.
Equal-weighted CAR Equal weighted [-3,+3] cumulative abnormal returns around the M&A
event.
34

Figure 1: Country/Jurisdiction Distribution of CEOs’ and Directors’ Cultural Heritage
This figure presents the country heritage of our sample CEOs and directors who work at US S&P 1500
firms. The likelihood that a CEO/director has heritage from a certain country/jurisdiction is represented in
colors. A warmer color of a country/jurisdiction indicates a higher likelihood that a CEO/director has that
country heritage, and a cooler color represents a lower likelihood that a CEO/director has that country’s
heritage.
35

Figure 2: Dynamic CEO-Board Cultural Proximity Over the Years After CEO Turnover
This figure plots the CEO-board cultural proximity over the years after CEO turnover (CEO Tenure). The
horizontal axis represents the number of years after the CEO assumes office. Year 0 is the year when the
CEO is appointed. The vertical axis represents the CEO-board cultural proximity. Note that CEO-board
cultural proximity is standardized (by subtracting the mean of its distribution and then dividing by the
standard deviation of its distribution), so it includes negative values.
36

Figure 3: Year-by-Year Evolution of CEO-Board Cultural Proximity after CEO Turnover
This figure plots the estimated coefficients on indicator variables of each year since CEO turnover from
estimation of equation (2). The confidence intervals are 90%, 95% and 99%, respectively. The formal
regression results are reported in Table 4.
37

Table 1: Descriptive Statistics
This table provides the descriptive statistics of variables defined in Appendix B.
Variable N Mean p50 SD Min Max

CEO-Board Cultural Proximity 14670 0.000 0.223 1.000 -5.620 1.500
#Years Post CEO Turnover 14670 7.714 6.000 7.419 0.000 61.000
Average Director Age 14670 62.535 62.600 3.671 46.000 79.250
Average Director Tenure 14670 9.019 8.545 3.837 0.000 31.000
% Financial Experts 14670 0.219 0.200 0.140 0.000 0.875
% Busy Directors 14670 0.213 0.200 0.176 0.000 1.000
CEO Duality 14670 0.484 0.000 0.500 0.000 1.000
Board Size 14670 9.444 9.000 2.310 3.000 34.000
% Female Directors 14670 0.153 0.143 0.110 0.000 0.750
ROA 14670 0.046 0.044 0.091 -2.283 0.783
Annual Volatility 14670 0.092 0.080 0.051 0.017 0.877
Firm Size 14670 8.294 8.179 1.712 3.762 14.804
Large Shareholder CEO 13292 0.093 0.000 0.290 0.000 1.000
E-index 12094 2.160 2.000 1.134 0.000 6.000
% Connected Directors 14670 0.097 0.000 0.173 0.000 1.000
# Connected Directors 14670 0.805 0.000 1.517 0.000 16.000
Value-weighted CAR 886 0.004 0.004 0.058 -0.279 0.296
Equal-weighted CAR 886 0.004 0.004 0.060 -0.294 0.297
38

Table 2: Correlations
This table reports the Pearson correlations of the variables defined in Appendix B. *, **, and *** represent two-tailed statistical significance levels
at p<0.10, p<0.05, and p<0.01, respectively.
No. 1 2 3 4 5 6
1 CEO-Board Cultural Proximity 1.0000
2 #Years Post CEO Turnover 0.0153* 1.0000
3 Average Director Age 0.0296*** 0.1868*** 1.0000
4 Average Director Tenure 0.0350*** 0.4319*** 0.4812*** 1.0000
5 % Financial Experts 0.0022 -0.0297*** 0.0386*** -0.0426*** 1.0000
6 % Busy Directors -0.0435*** -0.1667*** -0.0057 -0.2197*** 0.0679*** 1.0000
7 CEO Duality 0.0257*** 0.2898*** 0.0408*** 0.0293*** -0.0225*** 0.0748***
8 Board Size -0.0349*** -0.1245*** 0.0726*** -0.0585*** -0.1399*** 0.1905***
9 % Female Directors 0.0016 -0.1390*** -0.1066*** -0.1753*** 0.0861*** 0.1641***
10 ROA -0.0058 0.0171** -0.0160* 0.0564*** -0.0036 0.0161*
11 Annual Volatility 0.0067 -0.0134 -0.1238*** -0.0924*** 0.0233*** -0.0387***
12 Firm Size -0.0281*** -0.1095*** 0.1158*** -0.1001*** 0.0039 0.3232***
13 Large Shareholder CEO -0.0018 0.4443*** 0.0176** 0.2287*** -0.1159*** -0.1540***
14 % Connected Directors 0.0250*** 0.0915*** 0.0566*** 0.1476*** 0.0162** -0.0662***
15 # Connected Directors 0.0107 0.0575*** 0.0403*** 0.1067*** -0.0129 -0.0356***
16 Value-weight CAR -0.0151 0.0732** 0.0172 0.0569* 0.0234 -0.0090
17 Equal-weight CAR -0.0127 0.0748** 0.0216 0.0615* 0.0108 -0.0187
No. 7 8 9 10 11 12
8 Board Size 0.0729*** 1.0000
9 % Female Directors 0.0377*** 0.2459*** 1.0000
10 ROA 0.0262*** -0.0282*** 0.0303*** 1.0000
11 Annual Volatility -0.0083 -0.1784*** -0.1478*** -0.2452*** 1.0000
12 Firm Size 0.1498*** 0.6055*** 0.2987*** -0.0357*** -0.2657*** 1.0000
13 Large Shareholder CEO 0.1803*** -0.1631*** -0.1401*** 0.0211** 0.0774*** -0.1872***
14 % Connected Directors 0.0182** -0.0392*** -0.0269*** 0.0191** -0.0043 -0.0675***
15 # Connected Directors 0.0150* 0.1177*** -0.0185** 0.0125 -0.0145* 0.0006
16 Value-weight CAR 0.0352 -0.0762** -0.0373 -0.0249 -0.0046 -0.0606*
17 Equal-weight CAR 0.0182 -0.0709** -0.0427 -0.0250 -0.0064 -0.0556*
No. 13 14 15 16 17
14 % Connected Directors 0.0512*** 1.0000
15 # Connected Directors 0.0218** 0.9303*** 1.0000
16 Value-weight CAR 0.0526 0.0436 0.0405 1.0000
17 Equal-weight CAR 0.0580 0.0448 0.0416 0.9764*** 1.0000
39

Table 3: Dynamic CEO-Board Cultural Proximity After CEO Transition
This table reports the results of estimating the change in CEO-board cultural proximity after a new CEO
took office. The regression includes firm fixed effects and year fixed effects. Standard errors are clustered
at the firm level and reported in parentheses. *, **, and *** represent two-tailed statistical significance
levels at p<0.10, p<0.05, and p<0.01, respectively.
(1)
CEO-Board Cultural Proximity
#Years Post CEO Turnover 0.006**
(0.003)
Average Director Age 0.005
(0.007)
Average Director Tenure 0.003
(0.007)
% Financial Expert Directors 0.002
(0.109)
% Busy Directors 0.082
(0.093)
CEO Duality -0.009
(0.029)
Board Size -0.024***
(0.008)
% Female Directors -0.063
(0.154)
ROA -0.084
(0.085)
Annual Volatility -0.028
(0.192)
Firm Size 0.024
(0.034)
Constant -0.264
(0.447)
N 14670
adj. R-sq 0.011
Year fixed effects Yes
Firm fixed effects Yes
40

Table 4: Year-by-Year Evolution of CEO-Board Cultural Proximity After CEO Transition
This table reports the results of estimating how CEO-board cultural proximity changes in each year after
the new CEO assumes office. The baseline omitted group is Year 0 Post CEO Turnover. The regression
includes firm fixed effects and year fixed effects. Standard errors are clustered at the firm level and reported
in parentheses. *, **, and *** represent two-tailed statistical significance levels at p<0.10, p<0.05, and
p<0.01, respectively.
(1)
Year 1 Post CEO Turnover 0.085***
(0.023)
(0.025)
(0.027)
(0.029)
(0.032)
(0.034)
(0.036)
(0.039)
Year 9 and after Post CEO Turnover 0.152***
(0.044)
(0.007)
(0.007)
% Financial Expert Directors -0.008
(0.108)
% Busy Directors 0.083
(0.093)
CEO Duality -0.006
(0.028)
Board Size -0.023***
(0.008)
% Female Directors -0.069
(0.154)
ROA -0.099
(0.086)
Annual Volatility -0.028
(0.192)
Firm Size 0.024
(0.034)
Constant -0.358
(0.448)
N 14670
adj. R-sq 0.012
41

Table 5: Dynamic CEO-Board Cultural Proximity After Exogenous CEO Transition
This table reports the results of estimating the change in CEO-board cultural proximity after an exogenous
CEO transition. Exogenous CEO transitions refer to CEO transitions due to the prior CEO’s death, poor
health, or natural retirement. The regression includes firm fixed effects and year fixed effects. Standard
errors are clustered at the firm level and reported in parentheses. *, **, and *** represent two-tailed
statistical significance levels at p<0.10, p<0.05, and p<0.01, respectively.
(1)
#Years Post CEO Turnover 0.142***
(0.049)
(0.017)
(0.018)
% Financial Experts 0.155
(0.275)
% Busy Directors -0.088
(0.209)
CEO Duality -0.129*
(0.072)
Board Size -0.017
(0.020)
% Female Directors 0.084
(0.437)
ROA -0.247
(0.218)
Annual Volatility 0.634
(0.536)
Firm Size -0.098
(0.093)
Constant 1.418
(1.231)
N 905
adj. R-sq 0.142
42

Table 6: Is the Dynamic CEO-Board Cultural Proximity Capturing CEO-Director Networks?
This table reports the results of tests estimating the change in CEO-board cultural proximity after a new
CEO took office after controlling for director network. Column 1 (2) measures CEO-Director network
using # Connected Directors (% Connected Directors). In Panel A, we additionally control for CEO-
director network. In Panel B, we first regress CEO-board cultural proximity on CEO-director network and
the same set of controls and re-estimate equation (1) using the residuals of CEO-board cultural proximity.
In Panel C, we replace CEO-board cultural proximity with CEO-director network to see if #Years Post
CEO Turnover can generate a similar coefficient. All other variables are defined in Appendix B. All
regressions include firm fixed effects and year fixed effects. Standard errors are clustered at the firm level
and reported in parentheses. *, **, and *** represent two-tailed statistical significance levels at p<0.10,
p<0.05, and p<0.01, respectively.
Panel A
(1) (2)
CEO-Board Cultural Proximity CEO-Board Cultural Proximity
#Years Post CEO Turnover 0.006** 0.006**
(0.003) (0.003)
% Connected Directors -0.176*
(0.102)
# Connected Directors -0.015
(0.011)
Average Director Age 0.005 0.005
(0.007) (0.007)
Average Director Tenure 0.003 0.003
(0.007) (0.007)
% Financial Experts 0.004 0.004
(0.109) (0.109)
% Busy Directors 0.081 0.081
(0.093) (0.093)
CEO Duality -0.009 -0.009
(0.029) (0.029)
Board Size -0.025*** -0.023***
(0.008) (0.008)
% Female Directors -0.051 -0.055
(0.154) (0.154)
ROA -0.077 -0.080
(0.085) (0.085)
Annual Volatility -0.024 -0.021
(0.192) (0.192)
Firm Size 0.025 0.025
(0.034) (0.034)
Constant -0.277 -0.279
(0.447) (0.447)
Observations 14670 14670
Adjusted R-squared 0.012 0.012
Year fixed effects Yes Yes
Firm fixed effects Yes Yes
43

Panel B
(1) (2)
Proximity_Residual_pct Proximity_Residual_num
#Years Post CEO Turnover 0.006** 0.006**
(0.003) (0.003)
(0.007) (0.007)
Average Director Tenure -0.004 -0.004
(0.007) (0.007)
(0.109) (0.109)
% Busy Directors -0.002 -0.002
(0.093) (0.093)
(0.029) (0.029)
Board Size -0.000 -0.000
(0.008) (0.008)
(0.154) (0.154)
ROA -0.003 -0.003
(0.085) (0.085)
Annual Volatility 0.008 0.009
(0.192) (0.192)
Firm Size -0.002 -0.003
(0.034) (0.034)
Constant 0.015 0.016
(0.447) (0.447)
44

Panel C
(1) (2)
% Connected Directors # Connected Directors
#Years Post CEO Turnover -0.001** -0.011**
(0.001) (0.005)
Average Director Age 0.001 -0.002
(0.001) (0.011)
Average Director Tenure 0.004*** 0.029***
(0.001) (0.011)
(0.018) (0.171)
% Busy Directors -0.005 -0.054
(0.014) (0.126)
CEO Duality 0.001 -0.002
(0.006) (0.048)
Board Size -0.003 0.076***
(0.002) (0.025)
% Female Directors 0.063** 0.469*
(0.030) (0.271)
ROA 0.037** 0.246**
(0.015) (0.123)
(0.030) (0.272)
Firm Size 0.006 0.074
(0.006) (0.051)
Constant -0.075 -0.995
(0.085) (0.723)
45

Table 7: Potential Mechanisms - CEO Power or Entrenchment
This table reports the subsample results of cross-sectional tests on CEO success (Panel A) and CEO
ownership (Panel B). The dependent variable is CEO-Board Cultural Proximity. A CEO is classified as a
successful CEO if the average ROA over her tenure is above the industry average ROA and a mediocre one
otherwise. Column 1 (2) of Panel A uses the subsample of successful (mediocre) CEOs. A CEO is classified
as a large shareholder if he/she owns more than 5% of the company’s outstanding shares, and as a non-
large shareholder otherwise. Column 1 (2) of Panel B uses the subsample of large shareholder (non-large
shareholder) CEOs. All regressions include firm fixed effects and year fixed effects. Standard errors are
clustered at the firm level and reported in parentheses. *, **, and *** represent two-tailed statistical
significance levels at p<0.10, p<0.05, and p<0.01, respectively. We also report the p-value for the difference
in b1 from Fisher’s permutation test using 100 repetitions for Panel A.
Panel A: CEO Success

Dependent variable: CEO-Board Cultural Proximity
(1) (2)
Subsample: Successful CEOs Subsample: Mediocre CEOs
#Years Post CEO turnover b1 0.011*** -0.001
(0.004) (0.005)
Average Director Age 0.016* -0.010
(0.010) (0.009)
(0.009) (0.010)
% Financial Experts 0.193 -0.092
(0.156) (0.146)
(0.136) (0.123)
(0.037) (0.038)
Board Size -0.040*** -0.010
(0.012) (0.010)
(0.208) (0.218)
ROA -0.286* -0.126
(0.166) (0.121)
(0.252) (0.237)
Firm Size -0.040 0.027
(0.048) (0.040)
Constant -0.340 0.460
(0.666) (0.580)
p-value for difference in b1 0.050
46

Panel B: CEO Ownership
Dependent variable: CEO-Board Cultural Proximity
(1) (2)
Subsample: Large Subsample: Non-Large
Shareholder CEO Shareholder CEO
#Years Post CEO turnover b1 0.020*** 0.006*
(0.005) (0.003)
(0.018) (0.008)
(0.016) (0.008)
% Financial Experts -0.247 0.106
(0.270) (0.120)
(0.234) (0.101)
(0.105) (0.033)
Board Size -0.091*** -0.021**
(0.024) (0.009)
(0.354) (0.169)
ROA 0.260 -0.107
(0.204) (0.120)
Annual Volatility -0.393 -0.052
(0.247) (0.217)
Firm Size -0.018 0.061
(0.075) (0.040)
Constant -0.571 -0.440
(1.053) (0.516)
47

Table 8: CEO-Board Cultural Proximity and Strategic Decision-making
This table reports the results of tests estimating the effect of CEO-board cultural proximity on corporate
strategic decision-making. All regressions include firm fixed effects and year fixed effects. Standard errors
are clustered at the firm level and reported in parentheses. *, **, and *** represent two-tailed statistical
significance levels at p<0.10, p<0.05, and p<0.01, respectively.
(1) (2)
Value-weighted CAR Equal-weighted CAR
CEO-Board Cultural Proximity 0.009* 0.009*
(0.005) (0.005)
(0.003) (0.003)
(0.003) (0.003)
(0.037) (0.037)
(0.027) (0.030)
CEO Duality -0.005 0.001
(0.010) (0.010)
Board Size 0.000 -0.000
(0.003) (0.003)
% Female Directors 0.102** 0.101**
(0.049) (0.049)
ROA 0.022 0.020
(0.057) (0.058)
Annual Volatility -0.009 0.010
(0.129) (0.131)
Firm Size -0.011 -0.008
(0.010) (0.011)
Constant -0.067 -0.133
(0.178) (0.174)
48

Table 9: Cross-Sectional Analysis on Corporate Governance
This table reports the subsample results of cross-sectional tests on corporate governance quality. A firm is
classified as having weak governance if its e-index is above the sample median, which is 2, and otherwise
as having strong governance. Columns 1 and 3 (2 and 4) use the subsample of firms with weak (strong)
governance. All regressions include firm fixed effects and year fixed effects. Standard errors are clustered
at the firm level and reported in parentheses. *, **, and *** represent two-tailed statistical significance
levels at p<0.10, p<0.05, and p<0.01, respectively.
(1) (2) (3) (4)

Value-weighted CAR Equal-weighted CAR
Subsample: Subsample: Subsample: Subsample:
Weak Strong Weak Strong
governance governance governance governance
CEO-Board Cultural Proximity -0.063* 0.004 -0.086*** 0.006
(0.033) (0.006) (0.032) (0.006)
Average Director Age -0.016* 0.004 -0.014 0.005
(0.009) (0.005) (0.009) (0.005)
Average Director Tenure 0.009 0.001 0.010 0.001
(0.006) (0.005) (0.007) (0.005)
% Financial Experts -0.441** -0.018 -0.444*** -0.035
(0.180) (0.035) (0.170) (0.037)
% Busy Directors 0.053 -0.008 0.065 -0.006
(0.058) (0.044) (0.064) (0.046)
CEO Duality -0.001 0.006 -0.013 0.014
(0.034) (0.014) (0.038) (0.014)
Board Size -0.013* -0.001 -0.019*** -0.001
(0.007) (0.003) (0.007) (0.004)
% Female Directors 0.295** 0.070 0.281** 0.047
(0.129) (0.076) (0.135) (0.075)
ROA 0.137 0.073 -0.029 0.082
(0.332) (0.068) (0.291) (0.067)
Annual Volatility -0.720*** 0.059 -0.603** 0.065
(0.233) (0.240) (0.242) (0.248)
Firm Size 0.111*** -0.006 0.116*** -0.001
(0.037) (0.017) (0.040) (0.018)
Constant 0.297 -0.219 0.221 -0.293
(0.511) (0.288) (0.505) (0.289)
Observations 226 539 226 539
Adjusted R-squared 0.478 0.013 0.481 0.020
Year fixed effects Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes
49

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Dynamic CEO-Board Cultural Proximity*

Keywords: CEO-board cultural proximity; CEO-board dynamics

Electronic copy available at: https://ssrn.com/abstract=4452390

of this evolution on corporate governance.

We define CEO-board cultural proximity as the average similarity in cultural dimensions

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is usually unobservable and therefore difficult to measure. We attempt to overcome these

challenges by constructing a granular measure of CEO-board cultural proximity based on a large

and the legal system.

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similar to the CEO.

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is not merely capturing an existing CEO-director network.

the CEO-power channel.

2004). A priori, the role of CEO-board cultural proximity in strategic decision-making is

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Second, the dynamic evolution of the CEO-board relationship is important yet

understudied, as prior empirical research on board independence largely focuses on cross-sectional

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contribute by providing evidence on the dynamic evolution of CEO-board cultural proximity.

future studies on the cultural heritage of corporate leaders and directors.

additional test results and Section VI concludes.

II. PRIOR LITERATURE AND HYPOTHESES

2.1 Prior Literature

2.1.1 CEO cultural heritage and director ethnic characteristics

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origin is characterized by strong individualism, independence, long-term orientation, and

risk-adjusted stock returns.

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proximity between directors and their CEOs.

2.1.2 The importance of cultural proximity

CEO is smaller (Frijns and Garel 2021).

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2.2 Hypothesis Development

2.2.1 Dynamic CEO-board cultural proximity

evidence that CEOs prefer directors who are similar to themselves.

2.2.2 CEO-board cultural proximity and decision-making

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board cultural proximity’s impact on strategic decision-making efficiency is ambiguous.

the company’s strategic decision-making by enhancing their coordination.

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Considering the opposing effects of CEO-board cultural proximity on strategic decision-

making through coordination and groupthink, we hypothesize:

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3.1 CEOs’ and Directors’ Cultural Heritage Data

Using novel datasets, we construct a comprehensive sample of the cultural heritage of

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if the probability is below 2% to reduce measurement noise.

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US, which greatly enlarges the sample size.

France, Australia, India, and Brazil.

[Insert Figure 1 here]

3.2 CEO-Board Cultural Proximity

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dimension in the country/region.

is calculated as the average of all pairs of CEO-director cultural proximities. Specifically, a

standardize the distribution of CEO-board cultural proximity to enable easier interpretations. A

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3.3 Data on Board of Directors, CEOs and Firm Characteristics

14,670 firm-year observations.

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similar to their CEO.