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It pays to have friends

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  • Hwang, Byoung-Hyoun
  • Kim, Seoyoung
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    Abstract

    Currently, a director is classified as independent if he or she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay-performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter and that, consequently, a considerable percentage of the conventionally independent boards are substantively not.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 93 (2009)
    Issue (Month): 1 (July)
    Pages: 138-158

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    Handle: RePEc:eee:jfinec:v:93:y:2009:i:1:p:138-158

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Board independence Social ties Executive compensation;

    References

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