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Social Networks and Corporate Governance

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  • Avanidhar Subrahmanyam

Abstract

"We analyse frameworks that link corporate governance and firm values to governing boards' social networks and innovations in technology. Because agents create social networks with individuals with whom they share commonalities along the dimensions of social status and income, among other attributes, CEOs may participate in board members' social networks, which interferes with the quality of governance. At the same time, social connections with members of a board can allow for better evaluation of the members' abilities. Thus, in choosing whether to have board members with social ties to management, one must trade off the benefit of members successfully identifying high ability CEOs against the cost of inadequate monitoring due to social connections. Further, technologies like the Internet and electronic mail that reduce the extent of face-to-face networking cause agents to seek satisfaction of their social needs at the workplace, which exacerbates the impact of social networks on governance. The predictions of our model are consistent with recent episodes that appear to signify inadequate monitoring of corporate disclosures as well as with high levels of executive compensation. Additionally, empirical tests support the model's key implication that there is better governance and lower executive compensation in firms where networks are less likely to form." Copyright (c) 2008 The Author Journal compilation (c) 2008 Blackwell Publishing Ltd.

Suggested Citation

  • Avanidhar Subrahmanyam, 2008. "Social Networks and Corporate Governance," European Financial Management, European Financial Management Association, vol. 14(4), pages 633-662.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:4:p:633-662
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2007.00429.x
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    Cited by:

    1. Wesley Mendes-da-Silva, 2011. "Small Worlds and Board Interlocking in Brazil: A Longitudinal Study of Corporate Networks, 1997-2007," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(4), pages 465-492.
    2. Andres, Christian & Fernau, Erik & Theissen, Erik, 2014. "Should I stay or should I go? Former CEOs as monitors," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 26-47.
    3. Battistin, Erich & Graziano, Clara & Parigi, Bruno M., 2012. "Connections and performance in bankers’ turnover," European Economic Review, Elsevier, vol. 56(3), pages 470-487.
    4. Berger, Allen N. & Kick, Thomas & Koetter, Michael & Schaeck, Klaus, 2013. "Does it pay to have friends? Social ties and executive appointments in banking," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2087-2105.
    5. Andrikopoulos, Andreas & Economou, Labriana, 2016. "Coauthorship and subauthorship patterns in financial economics," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 12-19.
    6. Santiago Kopoboru, 2013. "Using interlocks as a corporate strategy: a descriptive analysis of the Spanish case," Working Papers 13.01, Universidad Pablo de Olavide, Department of Business Organization and Marketing (former Department of Business Administration).
    7. Carlo Drago & Roberto Ricciuti & Paolo Santella, 2015. "An Attempt to Disperse the Italian Interlocking Directorship Network: Analyzing the Effects of the 2011 Reform," Working Papers 11/2015, University of Verona, Department of Economics.
    8. Erich Battistin & Clara Graziano & G. Parigi, 2008. "Connections and Performance in Bankers' Turnover: Better Wed over the Mixen than over the Moor," CESifo Working Paper Series 2439, CESifo Group Munich.
    9. Jennifer K Gippel, 2013. "A revolution in finance?," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 125-146, April.

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