Directors as Connectors: The Impact of the External Networks of Directors on Firms

Abstract

The external networks of directors significantly impact firm value and decisions. Surrounding close gubernatorial elections, local firms with directors connected to winners increase value by 4.1% over firms connected to losers. Director network’s value increases with network strength and activities, and is not due to network homophily. Connected firms are more likely to receive state subsidies, loans, and tax credits. They obtain better access to bank loans, borrow more, pay lower interest, invest and employ more, and enjoy better long-term performance. Network benefits are concentrated on connected firms, possibly through quid pro quo deals, and unlikely spread to industry competitors.

Keywords: External Networks of Directors, Board of Directors, Connectors, Regression Discontinuity Design, Close Gubernatorial Election

JEL Classification: G32, G34