The Value of Firm Networks: A Natural Experiment on Board Connections
View/ Open
Date
2020-04-13
Author
Faia, Ester
Mayer, Maximilian
Pezone, Vincenzo
SAFE No.
269
Later Version
Metadata
Show full item record
Abstract
This paper presents causal evidence of the effects of boardroom networks on firm value and compensation policies. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms whose centrality in the network rises after the reform experience positive abnormal returns around the announcement date and are better hedged against shocks. Information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. Firms benefit more from boardroom centrality when they are more central in the input-output network, hence more susceptible to upstream shocks, when they are less central in the cross-ownership network, or when they have low profitability or low growth opportunities. Network centrality also results in higher directors’ compensation, due to rent sharing and improved executives’ outside option, and more similar compensation policies between connected firms.
Research Area
Law and Finance
Keywords
firms’ networks, natural experiment, executives’ compensation
JEL Classification
D57, G14, G32, L14
Topic
Corporate Finance
Systematic Risk
Saving and Borrowing
Systematic Risk
Saving and Borrowing
Relations
1
Publication Type
Working Paper
Link to Publication
Collections
- LIF-SAFE Working Papers [334]