Is Good Advice Hard to Find?: The Impact of Director Connectedness on Financing and Investment

68 Pages Posted: 18 Nov 2018

See all articles by Vincent Intintoli

Vincent Intintoli

Clemson University, Department of Finance

Kathleen M. Kahle

University of Arizona - Department of Finance

Wanli Zhao

Renmin University of China

Date Written: October 20, 2018

Abstract

We explore the effect of director connectedness on firms’ investment and financing activities. Our evidence suggests that well-connected directors are more effective advisors, with outside and inside directors playing different roles. Outside directors have better information regarding external factors such as industry trends and policy changes, all of which are important when evaluating investment decisions. Results suggest that during competition shocks and changes in economic policy uncertainty, well-connected outside directors have greater influence on investment decisions than inside directors. Outside director connectedness also has a more pronounced effect on a firm’s R&D outcome than inside director connectedness. Connected inside and outside directors have similar impact on the market reaction to acquisition activity, indicating that all well-connected directors are associated with mergers that are perceived to be more valuable. However, well-connected inside directors play a prominent role in lowering firms’ financing costs, particularly when information asymmetry is high.

Keywords: Centrality, Director Connectedness, Investment, R&D, Economic Policy Uncertainty, Cost of Debt, Seasoned Equity Offers

JEL Classification: G30, J33, M52

Suggested Citation

Intintoli, Vincent and Kahle, Kathleen M. and Zhao, Wanli, Is Good Advice Hard to Find?: The Impact of Director Connectedness on Financing and Investment (October 20, 2018). Available at SSRN: https://ssrn.com/abstract=3270299 or http://dx.doi.org/10.2139/ssrn.3270299

Vincent Intintoli

Clemson University, Department of Finance ( email )

Clemson, SC 29634
United States
864-656-2263 (Phone)

Kathleen M. Kahle (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

Wanli Zhao

Renmin University of China ( email )

59 Zhongguancun Street
Beijing, 100872
China

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