This paper investigates the impact of social ties on the effectiveness of boards of directors. When the CEO and a number of directors belong to the same social networks, the CEO is less likely to be dismissed for poor performance. The results are robust to different measures of performance and networks, consistent after controlling for CEO ability, and not due to connected boards' superior information. Socially connected CEOs are also more likely to find new and better employment after a forced departure. Evidence from the paper suggests that close social ties among board members impact the workings of the board of directors.
Using the network of university classmates among corporate directors and politicians and the regression discontinuity design of close gubernatorial elections from 1999 to 2010, we identify the positive and significant impact of social-network based political connections on firm value. Firms connected to elected governors increase value by 1.36% on average surrounding the election date. Political connections are more valuable in a state with a higher level of regulation and corruption, in smaller firms, and in firms dependent on external finance. Firms connected to election winners invest more, earn better operating performance, hold more cash, and enjoy better long-term stock performance.
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