Director Networks and Managerial Response to Non-Fundamental Price Shocks

Abstract

We examine whether boardroom connections help managers identify non-fundamental price shocks. We find that managers of well-connected firms are less likely to cut investment in response to exogenous non-fundamental drops in stock prices. Moreover, firms with stronger corporate governance and less managerial entrenchment are more successful at cultivating the informational benefits of boardroom connections. We further find that executive networks and director connections to board members at firms in the same industry are more effective at insulating firm investment from the adverse effects of exogenous non-fundamental shocks. Taken together, our findings suggest that improving managers’ assessment of firm fundamentals is an important channel through which director networks add value to the firm.

Keywords: Director networks; non-fundamental price shocks; corporate governance; corporate investment

JEL Classification: G3, G14, L14