CEO Connectedness and the Cost of Equity Capital
53 Pages Posted: 2 Dec 2019
Date Written: November 17, 2019
A larger CEO network can reduce the cost of equity by reducing information asymmetry between the firm and outsiders, and by increasing trust between the firm and stakeholders. Alternatively, a larger CEO network can increase the cost of equity because higher CEO connectedness encourages greater agency problems and more risk-taking by reducing the costs borne by the CEO from a termination. We find a positive relation between a CEO’s connectedness and the firm’s cost of equity, suggesting that, on average, the costs of CEO connectedness outweigh the benefits. The positive relation between a CEO’s connections and the firm’s cost of equity is attenuated for firms with high information asymmetry. This additional cross-sectional result is consistent with the higher benefits of improved information flow from connectedness in firms with high information asymmetry that can help mitigate some of the adverse effects of agency costs and risk-taking. We use multiple methods to address endogeneity and reverse causality problems, and our results remain generally robust.
Keywords: Social capital, social networks, cost of equity, implied cost of capital
JEL Classification: G30, M41, Z13
Suggested Citation: Suggested Citation