The Importance of Director External Social Networks to Stock Price Crash Risk

60 Pages Posted: 23 Apr 2018 Last revised: 19 Aug 2020

See all articles by Xiaohua Fang

Xiaohua Fang

Florida Atlantic University

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Yuping Zhao

University of Houston

Multiple version iconThere are 2 versions of this paper

Date Written: August 16, 2020

Abstract

Prior research documents that information transmitted via director networks affects firms’ policies and real economic activities. We explore whether information flow through director networks influences managers’ ability to hoard bad news. We find that the extent of external connections of the board of directors is negatively associated with future stock price crash risk. Additional analysis implies that this evidence is driven by firms with more powerful executives, with weaker auditor monitoring, or subject to strong investor protection, and by directors with greater monitoring incentives or responsibilities and directors with less firm-specific knowledge. Collectively, our research lends empirical support for the monitoring view under which better informed directors narrow the scope for bad news hoarding evident in stock price crash risk. In another series of tests, we fail to find evidence consistent with the information leakage view under which directors pass sensitive firm-specific information to connections who trade on the information before its public release. Other analysis helps dispel the concern that the endogenous match between directors and companies is spuriously responsible for our core results.

Keywords: crash risk, social network, social connections, board monitoring

Suggested Citation

Fang, Xiaohua and Pittman, Jeffrey A. and Zhao, Yuping, The Importance of Director External Social Networks to Stock Price Crash Risk (August 16, 2020). Available at SSRN: https://ssrn.com/abstract=3165281 or http://dx.doi.org/10.2139/ssrn.3165281

Xiaohua Fang

Florida Atlantic University ( email )

United States

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Yuping Zhao

University of Houston ( email )

334 Melcher Hall
Houston, TX 77204
United States
713-743-2166 (Phone)
713-743-4828 (Fax)

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