Corporate Finance Policies and Social Networks

Abstract:     
Social network theory suggests that individuals' preferences and decisions are affected by the actions of others. Such decision externalities arise from constraints on our ability to process or obtain costly information. This paper provides evidence that managers are influenced by their social peers when making corporate finance policy decisions. We create a matrix of social ties using data on current employment, past employment, education, and other activities for key executives and directors of US companies. We find that the more social connections two companies share with each other, the more similar their levels of investment are, as are their investment changes over time. To address endogeneity concerns, we find that two companies invest less similarly when an individual connecting them dies. The results extend to other discretionary corporate finance policies. Furthermore, companies positioned more centrally in the universe of social networks invest in a less idiosyncratic way, and exhibit better economic performance.

Number of Pages in PDF File: 48

Keywords: Corporate Finance Policy Decisions, Social Networks, Investment

JEL Classification: G31, L14

working papers series