It Pays to Have Friends

64 Pages Posted: 3 Aug 2008 Last revised: 10 Mar 2009

Byoung-Hyoun Hwang

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

Seoyoung Kim

Santa Clara University

Date Written: August 1, 2008

Abstract

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

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

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
United States

Seoyoung Kim

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Paper statistics

Downloads
1,882
Rank
5,847
Abstract Views
6,096