It Pays to Have Friends
Cornell University - Dyson School of Applied Economics and Management; Korea University - Department of Finance
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
Date posted: August 3, 2008 ; Last revised: March 10, 2009
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