The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital
74 Pages Posted: 3 Apr 2017
Date Written: December 3, 2016
In this paper we examine the effect of boardroom social capital, defined as aggregate benefits of social obligations and informal contacts formed through social networks of outside directors, on board 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 the firms pay premium for specific, important connections. In addition, network effects are more pronounced for firms with greater need for external resources. Firms that have suffered adverse events, such as bad merger, performance declines, and dividend cuts, pay higher connection premium. Finally, director-level analysis shows that socially well-connected directors perform important board roles and hold multiple directorships. Overall, our results are consistent with an efficient contracting explanation of boardroom pay.
Keywords: Board of Directors, Director Compensation, Agency Theory, Social Capital, Social Networks
JEL Classification: G30, Z13
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