It’s Not Who You Know — It’s Who Knows You: Employee Social Capital and Firm Performance

Abstract

We show that the social capital embedded in employees’ networks contributes to superior firm performance and provide evidence on the mechanism. Using data from a professional networking app, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection values the other more. Results show that firms with more employee social capital perform better. The positive effect arises primarily from employees being valued by others. We provide causal evidence by exploiting the enactment of an anti-graft act, which imparts a negative shock to networks.

Keywords: labor and finance; social capital; social connections; directed networks

JEL Classification: G30, G32, L14