Should You Bank on Your Network? Relational and Positional Emebeddedness in the Making of Financial Capital

Abstract

This study explores the mechanisms through which economic and social factors affect the performance of banks in syndication networks formed in the Canadian investment banking industry. It is argued that firms have a choice between building embedded network ties that are overlaid with social context and arms-length ties that are driven by the forces of atomistic competition. Furthermore, maintaining a mix of arms-length and embedded relationships prevents investment banks from relying on either the economic or the social drivers of competition. A mixed relational strategy also sends inconsistent signals about banks' strategies and capabilities to other market participants, which prevents the banks from accessing new deals in the future. It is also proposed that costs and benefits associated with either relational strategy are affected by the status of an investment bank. It is found that growth in firm's status decreases potential liabilities of embeddedness, thus making embedded ties more valuable to the firm.

Keywords: structural holes, networks, investment banks, canada