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.EXECUTIVES AND DIRECTORS OF major corporations are linked in many ways. They may serve together on the board of directors of another company or they may have worked together, either as employees or directors, in the past. They may also be connected outside their employment networks. Executives may play golf at the same country clubs, attend Business Roundtable meetings together, or serve as trustees for the same charitable organizations. Or, they may have graduated from the same MBA programs. Such network connections between the management groups of different firms may increase value for shareholders by creating conduits through which valuable information can flow from one firm to another.1 However, pre-existing network connections between executives and directors within a firm may undermine independent corporate governance, reducing firm value. Kilduff and Tsai (2003), McPherson, Smith-Lovin, and Cook (2001), Laumann (1973), and Marsden (1987.2 Subrahmanyam (2008) constructs a model in which firms trade off information flow about managerial ability against lax monitoring in deciding whether to add networked directors to the board. 154The Journal of Finance R We test whether network connections between management and potential directors influence director selection and subsequent firm performance. We find that firms with more powerful chief executive officers (CEOs) are more likely to add new directors with pre-existing network ties to the CEO. Furthermore, firms with more CEO-director connections have significantly lower valuations. Consistent with weaker board monitoring, high-connection firms make more frequent acquisitions, but their merger bids destroy $473 million of shareholder value on average, $354 million more than the bids of other firms. The effects are concentrated in firms with weak shareholder rights, suggesting that strong governance along other dimensions can partially substitute for effective monitoring by the board of directors.Following the wave of corporate scandals in the early 2000s, lawmakers mandated increases in the independence of corporate boards. Major U.S. exchanges now require the majority of directors in listed firms to be independent. In addition, new regulations have heightened independence requirements for key board committees. Yet, there is little empirical evidence linking greater board independence to better firm performance. One potential ...

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This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance. This paper was accepted by Amit Seru, finance.

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