Do Well-Connected Directors Affect Firm Value?

16 Pages Posted: 25 Oct 2015 Last revised: 28 Oct 2015

See all articles by Thomas C. Omer

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Frances M. Tice

University of Colorado at Boulder - Department of Accounting

Date Written: 2014

Abstract

Results have been mixed regarding whether, and how much, board of director connectedness is beneficial to firm value. Some prior research shows that overly busy directors are ineffective monitors, but these same “busy” directors can be valuable sources of information and other resources. For example, directors who are centrally located within a network can obtain information faster and those who are connected to other highly connected directors can access larger quantities of information. The information can take many forms including market trends, business innovations, and effective corporate practices and is available through these director network channels. However, increased information transfer speed (network centrality) and quantity (connections to highly-connected others) may not always balance out the negative effects of over-committed directors, information overload, and the propagation of poor business practices. Using social network analysis, we investigate whether well-connected directors increase firm value and find that firms with well-connected directors have higher market value, after controlling for their operating cycle, investment opportunity sets and market competition. We also find that well-connected outside (independent) directors have a bigger impact on increasing firm value than well-connected inside directors.

Suggested Citation

Omer, Thomas C. and Shelley, Marjorie and Tice, Frances M., Do Well-Connected Directors Affect Firm Value? (2014). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 24, No. 2, pp. 17-32, 2014. Available at SSRN: https://ssrn.com/abstract=2665654

Thomas C. Omer (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Frances M. Tice

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

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