The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital
Journal of Banking and Finance, Vol. 111, February 2020, Article 105729, 1-20
63 Pages Posted: 3 Apr 2017 Last revised: 13 Nov 2020
Date Written: October 3, 2020
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
Suggested Citation: Suggested Citation