The Value of Firm Networks: A Natural Experiment on Board Connections
63 Pages Posted: 11 Mar 2020 Last revised: 5 Jul 2022
Date Written: July 1, 2021
We present causal evidence on the effect of boardroom networks on firm value and compensation policies. We exploit a ban on interlocking directorates of Italian financial and insurance companies as exogenous variation and show that firms that lose centrality in the network experience negative abnormal returns around the announcement date. The key driver of our results is the role of boardroom connections in reducing asymmetric information. The complementarities with the input-output and cross-ownership networks are consistent with this channel. Using hand-collected data, we also show that network centrality has a positive effect on directors’ compensation, providing evidence of rent sharing.
Keywords: Firm Networks, Natural Experiment, Executives’ Compensation, Interlocking Directorates
JEL Classification: D57, G14, G32, L14
Suggested Citation: Suggested Citation