The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital

74 Pages Posted: 3 Apr 2017

See all articles by Stephen P. Ferris

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

David Javakhadze

Florida Atlantic University

Yun Liu

Claremont Colleges - Keck Graduate Institute

Date Written: December 3, 2016

Abstract

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

Suggested Citation

Ferris, Stephen P. and Javakhadze, David and Liu, Yun, The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital (December 3, 2016). Available at SSRN: https://ssrn.com/abstract=2941943 or http://dx.doi.org/10.2139/ssrn.2941943

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

David Javakhadze

Florida Atlantic University ( email )

College of Busines
777 Glades Road
Boca Raton, FL 33433
United States
561-297-2914 (Phone)

Yun Liu (Contact Author)

Claremont Colleges - Keck Graduate Institute ( email )

535 Watson Drive
Claremont, CA 91711
United States

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