External Networking and Internal Firm Governance

External Networking and Internal Firm Governance

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Article ID: iaor2012439
Volume: 67
Issue: 1
Start Page Number: 153
End Page Number: 194
Publication Date: Feb 2012
Journal: The Journal of Finance
Authors: ,
Keywords: social networks
Abstract:

We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO‐director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. Moreover, firms with more CEO‐director ties engage in more value‐destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.

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