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The Value of Firm Networks: A Natural Experiment on Board Connections

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  • Faia, Ester
  • Mayer, Max
  • Pezone, Vincenzo

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.

Suggested Citation

  • Faia, Ester & Mayer, Max & Pezone, Vincenzo, 2020. "The Value of Firm Networks: A Natural Experiment on Board Connections," CEPR Discussion Papers 14591, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:14591
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    1. Ricardo Giglio & Thomas Lux, 2021. "The Core of the Global Corporate Network," Networks and Spatial Economics, Springer, vol. 21(3), pages 681-705, September.

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    More about this item

    Keywords

    executives' compensation; firms networks; Natural Experiment;
    All these keywords.

    JEL classification:

    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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