External Networking and Internal Firm Governance

Authors

  • CESARE FRACASSI,

  • GEOFFREY TATE

    Search for more papers by this author
    • Fracassi is at the University of Texas at Austin and Tate is at the University of California at Los Angeles. We would like to thank Mark Grinblatt; Yael Hochberg; Albert Sheen; Aris Stouraitis; Avanidhar Subrahmanyam; Alexander Vedrashko; and seminar participants at Claremont McKenna College, Dartmouth College, University of Oregon, Tulane University, UCLA, University of Washington, the 2010 annual meeting of the American Finance Association (Atlanta), the 2010 International Conference on Corporate Finance and Financial Markets (Hong Kong), and the 2010 West Coast and Rocky Mountains Finance Workshop (Simon Fraser University) for helpful comments. We acknowledge financial support from the Fink Center for Finance and Investments (UCLA) and the Price Center for Entrepreneurial Studies (UCLA).


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.

Ancillary