Management Connection and Firm Performance: Evidence from the Global Financial Crisis
37 Pages Posted: 21 Apr 2020
Date Written: March 27, 2020
This chapter revisits the relationship between the connection CEOs develop with other top executives through appointment decisions and firm performance where the 2008-2009 financial crisis acts as a negative exogenous shock to internal trust. Contrary to the conventional wisdom that less CEO-independent management team harms firm performance, I find novel evidence of a positive association between management connection and crisis-period stock returns using a difference-in-differences design. This baseline finding is robust to various identification strategies with alternative measures of management connection, alternative samples, and placebo tests. Further analysis reveals that the relationship is more pronounced in firms that face more information uncertainty or have more complex business structure. The evidence suggests that management connection in fostering mutual trust between CEOs and subordinate executives helps facilitate effective collaboration and increases firm performance amid the crisis of trust.
Keywords: Management Connection; Firm Performance; Financial Crisis
JEL Classification: G14; G31; M54
Suggested Citation: Suggested Citation