Director Connections and Board Advising

Abstract

We introduce an easy-to-compute measure of board advising: Director Connections. This is the number of unique directors that a firm’s outside directors are connected to through common board service. We find that as firm complexity increases: Director Connections increases, firm value increases with Director Connections, and announcement returns to director appointments increases. The idea that connected directors are valuable advisors is further supported by the findings that connected directors have higher human capital, are paid more, disproportionately represented on advising committees, and do not improve monitoring effectiveness. Our contribution is to document that director connections are valuable in complex firms.

Keywords: Connected Directors; Advising quality; Board advising; Corporate governance; Firm complexity

JEL Classification: G32; G34; K22