Air quality and CEO cross–regional turnover ——The role of compensation or incentive

Abstract

We investigate firms' strategies to cope with the brain drain effect induced by air pollution. We presume that firms located in more polluted areas need to compensate for unpleasant locations in order to attract new CEO talent. Empirically, we find that firms located in more polluted areas are more likely to provide higher compensation packages or promotion incentives for successor CEOs from less polluted areas. The results are robust to using regional thermal inversion as an instrument, a regression discontinuity design, using alternative measures for air pollution, and ruling out alternative explanations. Additionally, the results are more pronounced when CEOs come from relatively less polluted overseas regions and for firms that have more industry peers outside this province, and are located in a region with poorer geographic livability. Overall, this paper provides the complete picture of the relation between air pollution and CEO turnover.