Does It Pay To Hire A Friend?
61 Pages Posted: 2 Nov 2021 Last revised: 14 Oct 2022
Date Written: November 1, 2021
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: Suggested Citation