Does It Pay To Hire A Friend?

61 Pages Posted: 2 Nov 2021 Last revised: 14 Oct 2022

See all articles by Yutong Xie

Yutong Xie

The College of New Jersey - School of Business

Jin Xu

Virginia Tech - Pamplin College of Business

Ruiyao Zhu

Virginia Tech - Pamplin College of Business

Date Written: November 1, 2021

Abstract

We find that personal ties with a firm’s board more than double a CEO candidate’s probability of being hired by the firm. Consistent with shareholder value maximization, firm performance improves more after CEO turnovers at firms hiring connected CEOs than those hiring unconnected CEOs. The result is concentrated in firms with severe information asymmetry, high CEO termination risk, and large coordination costs. Connected CEOs also make better acquisitions, especially when coordination costs are high. Overall, our results suggest that connected hiring increases firm performance because it mitigates information asymmetry and facilitates coordination between the CEO and the board.

Keywords: CEO hiring, connections, firm performance, information asymmetry

JEL Classification: G30, G34, G39

Suggested Citation

Xie, Yutong and Xu, Jin and Zhu, Ruiyao, Does It Pay To Hire A Friend? (November 1, 2021). Available at SSRN: https://ssrn.com/abstract=3954317 or http://dx.doi.org/10.2139/ssrn.3954317

Yutong Xie

The College of New Jersey - School of Business ( email )

Ewing, NJ 08628-0718
United States

Jin Xu

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://finance.pamplin.vt.edu/directory/xu.html

Ruiyao Zhu (Contact Author)

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://finance.pamplin.vt.edu/about-us/directory/zhu-r.html

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