Managers' External Social Ties at Work: Blessing or Curse for the Firm?
41 Pages Posted: 12 Jun 2012 Last revised: 12 Aug 2014
Date Written: May 22, 2014
Existing evidence shows that decision-makers’ social ties to internal co-workers can lead to reduced firm performance. In this paper, we show that decision-makers’ social ties to external transaction partners can also hurt firm performance. Specifically, we use 34 years of data from the National Basketball Association and study the relationship between a team's winning percentage and its use of players that the manager acquired through social ties to former employers in the industry. We find that teams with “tie-hired-players” underperform teams without tie-hired-players by 5 percent. This effect is large enough to change the composition of teams that qualify for the playoffs. Importantly, we show that adverse selection of managers and teams into the use of tie-hiring procedures cannot fully explain this finding. Additional evidence suggests instead that managers deliberately trade-off private, tie-related benefits against team performance.
Keywords: social networks, social capital, principal-agent relationship, worker allocation, basketball
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By Jeongsik Lee