Do Well-Connected Directors Improve Firm Performance?

Abstract:     
This study examines whether firms with well-connected boards of directors are associated with higher firm performance. Overly busy directors are sometimes ineffective monitors. However, these same “busy” directors may be valuable sources of information. Cross-firm connections formed by shared directors are channels for the transfer of information, such as market trends, business innovations, and effective corporate practices. Shared connections form a large network composed of directors and boards. Tradeoffs for increased access to information include overcommitted directors, information overload, and possibly the propagation of damaging information, such as poor business practices. We find that firms with directors who, on average, are more centrally located within the network, or are directly connected with other highly connected individuals, experience lower firm performance, which is consistent with the busyness hypothesis. However, firms with more investment opportunities benefit from increased speed and quantity of information transfer from the director network. We also provide evidence that highly connected directors experience information overload, leading to decreased performance. This study combines methods from network theory and corporate governance to further examine the benefits and costs of shared directorates.

Number of Pages in PDF File: 47

Keywords: social networks, board of directors, information overload, corporate governance, firm performance

JEL Classification: M4, M40, M41, M49, G3, G30, G34

working papers series