Are Directors Really Irrelevant to Capital Structure Choice?

Abstract

DeAngelo and Roll (2015) observe that leverage cross-sections change significantly over even short periods. This finding is largely incompatible with existing models operating on the assumption that firms choose leverage levels in isolation. In this paper, we ask how executive networks might affect the decision making process. Using a sample of large US firms, we apply the stochastic actor dynamic social network methodology to show that firms with directors in common tend to become more similar in capital structure. Network influence effects are economically significant even with traditionally employed capital structure variables and are robust to director selection effects.

Keywords: Board interlocking network, capital structure

JEL Classification: G31, G32