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The value of firm networks: A natural experiment on board connections

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  • Faia, Ester
  • Mayer, Maximilian
  • Pezone, Vincenzo

Abstract

This paper presents causal evidence of the effects of boardroom networks on firm value. 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 that become more central in the network as a result of the shock experience positive abnormal returns around the announcement date. We find that 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. We also find that firms benefit more from boardroom centrality when they are more central in the input-output network, as this reinforces information complementarities, or when they are less central in the cross-ownership network, as well as when they suffer from low profitability and low growth opportunities. Network centrality also results in higher compensation for board directors.

Suggested Citation

  • Faia, Ester & Mayer, Maximilian & Pezone, Vincenzo, 2020. "The value of firm networks: A natural experiment on board connections," SAFE Working Paper Series 269, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewp:269
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    More about this item

    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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