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It Pays to Have Friends

Byoung-Hyoun Hwang

Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance

Seoyoung Kim

Santa Clara University

August 1, 2008

Journal of Financial Economics (JFE), Forthcoming

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

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Date posted: August 3, 2008 ; Last revised: March 10, 2009

Suggested Citation

Hwang, Byoung-Hyoun and Kim, Seoyoung, It Pays to Have Friends (August 1, 2008). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1195313

Contact Information

Byoung-Hyoun Hwang (Contact Author)
Cornell University - Dyson School of Applied Economics and Management ( email )
Ithaca, NY
United States
HOME PAGE: http://www.bhwang.com
Korea University - Department of Finance
Seoul, 136-701
Seoyoung Kim
Santa Clara University ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
Feedback to SSRN

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