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Management connectedness and corporate investment

Author

Listed:
  • Agha, Mahmoud
  • Pham, Man Duy (Marty)
  • Yu, Jing

Abstract

In response to the mixed views about the appointment-based connectedness between CEO and subordinate C-level executives, we systematically analyze the net effect of top management team (TMT) connectedness in the context of real corporate investment activities. We document a robust negative association between TMT connectedness and corporate investments, driven by the reduction in corporate R&D spending and acquisitions. Further tests show investment inefficiency in firms with closely connected managers, suggesting an average weak governance effect of TMT connectedness. To explain such an effect, we find that connected executives tend to avoid risky investments and shirk investment responsibilities when facing little career concerns. Interestingly, the agency cost and coordination benefit of interconnected TMT are not mutually exclusive. The adverse investment effect of TMT connectedness tempers in firms facing financial constraints and even reverses during the Global Financial Crisis when financial constraints are most likely binding.

Suggested Citation

  • Agha, Mahmoud & Pham, Man Duy (Marty) & Yu, Jing, 2021. "Management connectedness and corporate investment," Journal of Banking & Finance, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:jbfina:v:124:y:2021:i:c:s0378426620303034
    DOI: 10.1016/j.jbankfin.2020.106042
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    Citations

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    Cited by:

    1. Esparcia, Carlos & Jareño, Francisco & Umar, Zaghum, 2022. "Revisiting the safe haven role of Gold across time and frequencies during the COVID-19 pandemic," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    2. Md. Mahiuddin Sabbir & Khan Md Raziuddin Taufique, 2022. "Sustainable employee green behavior in the workplace: Integrating cognitive and non‐cognitive factors in corporate environmental policy," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 110-128, January.
    3. Lorenzo Nalin & Giuliano Toshiro Yajima, 2021. "Commodities fluctuations, cross border flows and financial innovation: A stock‐flow analysis," Metroeconomica, Wiley Blackwell, vol. 72(3), pages 539-579, July.
    4. Pham, Man Duy (Marty), 2022. "Management connection and firm performance: Evidence from Global Financial Crisis," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    5. Pham, Man Duy (Marty), 2022. "Management friendship and insider opportunism," International Review of Financial Analysis, Elsevier, vol. 84(C).

    More about this item

    Keywords

    Corporate investments; Management connectedness; Corporate governance;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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