64 Pages Posted: 3 Aug 2008 Last revised: 10 Mar 2009
Date Written: August 1, 2008
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.
Keywords: Board Independence, Social Ties, Executive Compensation
JEL Classification: G3, G34, G39
Suggested Citation: 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: https://ssrn.com/abstract=1195313