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External Networking and Internal Firm Governance

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

Cesare Fracassi

University of Texas at Austin

Geoffrey A. Tate

University of North Carolina Kenan-Flagler Business School; 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

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

Cesare Fracassi

University of Texas at Austin ( email )

McCombs School of Business
2110 Speedway Stop B6600
Austin, TX 78712-1276
United States
512-232-6843 (Phone)

HOME PAGE: http://https://faculty.mccombs.utexas.edu/cesare.fracassi/

Geoffrey A. Tate (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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