CEO trustworthiness and investment efficiency: evidence from China

Purpose This study aims to investigate the influence of chief executive officer (CEO) trustworthiness on firm investment efficiency and explores how this relationship varies in different contexts, including product market competition (PMC), institutional investors, media coverage, analyst monitoring and ownership structure. Design/methodology/approach The authors examined a sample of A-Share non-financial firms listed on the Shanghai and Shenzhen Stock Exchanges from 2005–2018 by using panel date regression techniques. The robustness of the findings is affirmed through alternative measures of investment efficiency and various econometric techniques. Further, various endogeneity tests are conducted to confirm that the findings are not affected by potential bias. Findings The authors find a significant positive effect of CEO trustworthiness on firms’ investment efficiency and exhibit that CEO trustworthiness mitigates the issue of underinvestment rather than overinvestment. Further, PMC strengthens the association between CEO trustworthiness and investment efficiency. The influence is more pronounced when institutional investors, media and analyst monitoring are low and in non state-owned firms. Likewise, financial reporting quality is found to be an underlying mechanism for the positive association between CEO trustworthiness and investment efficiency. Research limitations/implications The reliance on a location-specific index of CEO trustworthiness may obscure its true nature, and caution is warranted when generalizing these results to other regions. Practical implications This study suggests that elevating a trustworthy CEO to the firm upper echelon can improve investment efficiency. Policymakers and investors should recognize and leverage the effect of CEO trustworthiness in firms, especially those with weaker governance structures. Originality/value This study enriches the literature about investment efficiency by introducing a novel determinant, CEO trustworthiness and establishes that it acts as an informal social institution that improves firms’ resource utilization in emerging economies with weak governing structures.