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The Temptation of Social Ties: When Interpersonal Network Transactions Hurt Firm Performance

  • Leif Brandes

    ()

    (Department of Business Administration, University of Zurich)

  • Marc Brechot

    ()

    (Department of Business Administration, University of Zurich)

  • Egon Franck

    ()

    (Department of Business Administration, University of Zurich)

We introduce agency concerns to social capital theory and predict that managers can use individual social capital to reduce personal effort costs, which is not in the best interest of the firm. To test this prediction, we collect data on all 8,019 hiring decisions from general managers in the National Basketball Association between 1981 and 2011. We find that managers have a clear preference for hiring players through social ties. The probability that a manager hires players from an NBA franchise to which he is socially tied is 27.6% higher than for an untied franchise. To isolate the motivation for this behavior, we complement our data with information on the sporting performance of teams. In line with agency theory, we find that the hiring of players through social ties reduces team performance. The effect is large: on average, each social-tie player reduces team winning percentage by 5.4%. Overall, this paper documents first empirical evidence that decision makers’ use of individual social capital can lead to reduced firm-level performance.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/159_ISU_full.pdf
File Function: Revised version, 2012
Download Restriction: no

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 00159.

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Length: 40
Date of creation: 2011
Date of revision: 2012
Handle: RePEc:iso:wpaper:0159
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