External Networking and Internal Firm Governance

Fracassi, Cesare; Tate, Geoffrey A.

Download This Paper

Open PDF in Browser

Add Paper to My Library

External Networking and Internal Firm Governance

Journal of Finance, 67 (1), pp 153-194

50 Pages Posted: 14 Aug 2008 Last revised: 5 Feb 2015

See all articles by Cesare Fracassi

Geoffrey A. Tate

University of Maryland - Robert H. Smith School of Business; National Bureau of Economic Research (NBER)

Date Written: 2012

Abstract

We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO-director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. Moreover, firms with more CEO-director ties engage in more value-destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.

Keywords: Corporate Governance, Social Networks, Board Selection, Mergers and Acquisitions, Firm Value

JEL Classification: G34, L14

Suggested Citation: Suggested Citation

Fracassi, Cesare and Tate, Geoffrey A., External Networking and Internal Firm Governance (2012). Journal of Finance, 67 (1), pp 153-194, Available at SSRN: https://ssrn.com/abstract=1213358