The Value of Social Networks During Periods of Distress

Abstract

We examine the impact of social networks when they are likely to be most valuable. We find that firms well-connected to other firms through executives and directors have better performance and more investments during the 2007-2009 financial crisis, and this is especially true among financially constrained firms. When individual firms become severely financially distressed, personal connections to lenders reduce the probability of bankruptcy filing. Firms with lender connections are also more likely to obtain Debtor-in-Possession financing and emerge from Chapter 11 if they nevertheless have to file. Overall, our results suggest that social networks benefit firms in times of distress.

Keywords: Social Networks, Financial Crisis, Financial Distress, Bankruptcy

JEL Classification: A14, G31, G33