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The price of boardroom social capital: The effects of corporate demand for external connectivity

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  • Ferris, Stephen P.
  • Javakhadze, David
  • Liu, Yun

Abstract

In this study we examine the effect of boardroom social capital, defined as the aggregate benefits from the social networks of outside directors, on director compensation. Using a large panel of nine thousand firm-year observations for the period 2007–2013, we find that boardroom social capital is positively priced. Further analysis shows that firms pay a premium for networked directors. Firms that have suffered adverse events such as a bad merger, performance declines, or dividend cuts, pay a higher connection premium. We determine that well-connected directors perform important board roles and hold multiple directorships. Overall, our results are consistent with an efficient contracting explanation for boardroom pay.

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  • Ferris, Stephen P. & Javakhadze, David & Liu, Yun, 2020. "The price of boardroom social capital: The effects of corporate demand for external connectivity," Journal of Banking & Finance, Elsevier, vol. 111(C).
    • Handle: RePEc:eee:jbfina:v:111:y:2020:i:c:s0378426619303024
    DOI: 10.1016/j.jbankfin.2019.105729
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    More about this item

    Keywords

    Board of directors; Director compensation; Agency theory; Social capital; Social networks;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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