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

Posted: 23 Apr 2018

See all articles by Xiaohua Fang

Xiaohua Fang

Georgia State University - School of Accountancy

Jeffrey Pittman

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

Yuping Zhao

University of Houston

Date Written: April 18, 2018

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, with less firm-specific knowledge, and with more valuable reputations to protect. We further find that director external network size is negatively associated with a variety of bad new hoarding signals. 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. In contrast to our strong, robust evidence on the role that director external networks play, we only find some results implying that CEO-director internal networks shape stock price crash risk.

Suggested Citation

Fang, Xiaohua and Pittman, Jeffrey A. and Zhao, Yuping, The Importance of Director External and Internal Social Networks to Stock Price Crash Risk (April 18, 2018). Available at SSRN: https://ssrn.com/abstract=3165281

Xiaohua Fang

Georgia State University - School of Accountancy ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
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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