The Value of Firm Networks: A Natural Experiment on Board Connections

48 Pages Posted: 11 Mar 2020 Last revised: 14 Apr 2020

See all articles by Ester Faia

Ester Faia

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Maximilian Mayer

Goethe University Frankfurt - Faculty of Economics and Business Administration

Vincenzo Pezone

Goethe University Frankfurt - Research Center SAFE

Date Written: April 13, 2020

Abstract

This paper presents causal evidence of the effects of boardroom networks on firm value and compensation policies. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms whose centrality in the network rises after the reform experience positive abnormal returns around the announcement date and are better hedged against shocks. Information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. Firms benefit more from boardroom centrality when they are more central in the input-output network, hence more susceptible to upstream shocks, when they are less central in the cross-ownership network, or when they have low profitability or low growth opportunities. Network centrality also results in higher directors’ compensation, due to rent sharing and improved executives’ outside option, and more similar compensation policies between connected firms.

Keywords: Firms’ Networks, Natural Experiment, Executives’ Compensation

JEL Classification: D57, G14, G32, L14

Suggested Citation

Faia, Ester and Mayer, Maximilian and Pezone, Vincenzo, The Value of Firm Networks: A Natural Experiment on Board Connections (April 13, 2020). SAFE Working Paper No. 269. Available at SSRN: https://ssrn.com/abstract=3552485 or http://dx.doi.org/10.2139/ssrn.3552485

Ester Faia

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Maximilian Mayer

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Vincenzo Pezone (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33706 (Phone)

HOME PAGE: http://sites.google.com/site/vpezone/

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