Getting by with the Advice of Their Friends: CEOS' Advice Networks and Firms' Strategic Responses to Poor Performance

Abstract

This paper theorizes that relatively poor firm performane can prompt chief executive officers (CEOs) to seek more advice from executives of other firms who are their friends or similar to them and less advice from acquaintances or dissimilar others and suggests how and why this pattern of advice seeking could reduce firms' propensity to change corporate strategy in response to poor performance. We test our hypotheses with large-sample survey data on the identities of CEOs' advice contacts and archival data on firm performance and corporate strategy. The results confirm our hypotheses and show that executives' social network ties can influence firms' responses to economic adversity, in particular by inhibiting strategic change in response to relatively poor firm performance. Additional findings indicate that CEOs' advice seeking in response to low performance may ultimately have negative consequences for subsequent performance, suggesting how CEOs' social network ties could play an indirect role in organizational decline and downward spirals in firm performance.

Keywords: social networks, strategic change, top executives

JEL Classification: G34