Boardroom Networks and Corporate Investment

Abstract

This paper investigates whether network effects on investment exist and whether firms strategically herd their connected firms. Using novel data on board members, we utilize board-interlock networks where two firms share at least one common board member and estimate network effects on firms' investment decisions. Our identification strategy to resolve the endogeneity issue is to adopt the characteristics of the peers of peers as legitimate instrumental variables. Empirical findings confirm significant network effects on firms' investment and show that firms strategically follow their connected firms with high quality information.

Keywords: Network effects, strategic herding, information quality, board interlock, investment

JEL Classification: D25, D81, G30, L14, L20