The Proportion and Social Capital of Outside Directors and Their Impacts on Firm Value: evidence from Korea

Abstract

This study examines the effects of outside directors' proportion and their social capital on firm value using a sample of 473 large, publicly traded Korean companies from 1998 through 2003. Outside director proportion, which is defined as the ratio of outside directors to the total number of directors of a company, is regarded as a proxy of board independence. Outside director social capital, which is defined as the degree to which outside board members have outside contacts in the external environment, is regarded as a proxy of board's ability to extract valuable resources or information from the environment. It is hypothesised that both the proportion of outside directors to the total directors and outside director social capital will be positively associated with firm value. This study reports strong GLS evidence of the relationship between outside director social capital and firm value but no significant relationship between outside director proportion and firm value. Copyright (c) 2007 The Author; Journal compilation (c) 2007 Blackwell Publishing Ltd.

The Complexity of Social Capital: The Influence of Board and Ownership Interlocks on Implied Cost of Capital in an Emerging Market

“…Like Rossoni et al [50], this study contributes to the research into social capital by evaluating the relational resources of the board using the market value (capital) embedded in the network of relationships of companies and innovates by measuring the cost of capital by ex ante estimates. This goes further than other studies, like the one by Kim [26], who measured social capital by way of affiliations in company boards and university governing boards, and by Stevenson and Radin [69], who measured social capital by way of surveys with CEOs.…”

“…Finegold et al [68] found evidence that the social capital of the board guarantees that companies receive resources, advice, and better monitoring and are assured of a better performance. Kim [26], using Tobin's indicator, produces empirical evidence that the social capital of external board members is positively associated with the market value. Like Rossoni et al [50], this study contributes to the research into social capital by evaluating the relational resources of the board using the market value (capital) embedded in the network of relationships of companies and innovates by measuring the cost of capital by ex ante estimates.…”

“…For example, Kim [26] analyzes the effects of the proportion of the number of outside board members as vectors of the social capital on market value. He points out that such ties have the capacity to extract valuable resources from the environment.…”

“…This is because there is a whole range of studies that deal with the board and director interlock [15,[22][23][24][25][26] and ownership interlock [27][28][29], but there are few studies that consider these two types of relationship jointly [30], especially in emerging markets like Brazil.…”

“…Studies also indicate that the best-positioned board directors in the network tend to have a greater capacity for receiving information, resources, and knowledge by way of their privileged access to different, unconnected groups [31]; in other words, they have greater social capital [26,33,34].…”