Boardroom Centrality and Systematic Risk

48 Pages Posted: 13 Dec 2018 Last revised: 7 May 2020

See all articles by Yunsen Chen

Yunsen Chen

Central University of Finance and Economics (CUFE)

Yao Lu

Tsinghua University - School of Economics & Management

Dengjin Zheng

Central University of Finance and Economics

Date Written: May 1, 2020

Abstract

We find that boardroom centrality formed by sharing directors across firms can significantly increase firms’ systematic risk. This positive effect is stronger when the shared directors also sit on the boards of other large firms or of firms included in the stock market index. It is also stronger when boardroom centrality is formed by inside executive directors or more experienced directors. Further corroborating these inferences, we find that boardroom centrality increases the accounting fundamental and corporate policy correlations between the appointing firm and other firms in the market. Furthermore, firms with higher boardroom centrality demonstrate significantly less idiosyncratic corporate behavior. Finally, we find that boardroom centrality is positively associated with firms’ cost of equity. These results remain robust after addressing endogenous issues using identification based on exogenous changes in directorship outside the focal firm. Overall, these findings highlight the important roles of corporate leaders in affecting firms’ systematic risk.

Keywords: accounting beta; social network; information transfer; cost of equity

JEL Classification: G30; M41; L14

Suggested Citation

Chen, Yunsen and Lu, Yao and Zheng, Dengjin, Boardroom Centrality and Systematic Risk (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=3292653 or http://dx.doi.org/10.2139/ssrn.3292653

Yunsen Chen

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

HOME PAGE: http://yunsenchen.weebly.com/

Yao Lu (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Dengjin Zheng

Central University of Finance and Economics ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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