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It Pays to Have FriendsByoung-Hyoun HwangPurdue University - Krannert School of Management Seoyoung KimSanta Clara University August 1, 2008 Journal of Financial Economics (JFE), Forthcoming Abstract: Currently, a director is classified as independent if he/she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent, but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter, and that consequently, a considerable percentage of the conventionally independent boards are substantively not.
Number of Pages in PDF File: 64 Keywords: Board Independence, Social Ties, Executive Compensation JEL Classification: G3, G34, G39 Accepted Paper SeriesDate posted: August 3, 2008 ; Last revised: March 10, 2009Suggested CitationContact Information
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