The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital

Abstract

In this study we examine the effect of boardroom social capital, defined as the aggregate benefits
from the social networks of outside directors, on director compensation. Using a large panel of
nine thousand firm-year observations for the period 2007-2013, we find that boardroom social
capital is positively priced. Further analysis shows that firms pay a premium for networked
directors. Firms that have suffered adverse events such as a bad merger, performance declines, or
dividend cuts, pay a higher connection premium. We determine that well-connected directors
perform important board roles and hold multiple directorships. Overall, our results are consistent
with an efficient contracting explanation for boardroom pay.

Keywords: Board of Directors, Director Compensation, Agency Theory, Social Capital, Social Networks

JEL Classification: G30, Z13