External Networking and Internal Firm Governance

TLDR

The study uses panel data on S&P 1500 firms and exploits board changes from director turnover to identify external network ties between CEOs and directors. CEO‑director ties are linked to lower firm value, more value‑destroying acquisitions, and weaker board monitoring, especially when other governance mechanisms are lacking.

Abstract

ABSTRACT We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO‐director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. Moreover, firms with more CEO‐director ties engage in more value‐destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.