Working Paper: CEPR ID: DP14591
Authors: Ester Faia; Max Mayer; Vincenzo Pezone
Abstract: This paper presents causal evidence of the effects of boardroom networks on firm value and compensation policies. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms whose centrality in the network rises after the reform experience positive abnormal returns around the announcement date and are better hedged against shocks. Information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. Firms benefit more from boardroom centrality when they are more central in the input-output network, hence more susceptible to upstream shocks, when they are less central in the cross-ownership network, or when they have low profitability or low growth opportunities. Network centrality also results in higher directors’ compensation, due to rent sharing and improved executives’ outside option, and more similar compensation policies between connected firms.
Keywords: firms; networks; natural experiment; executives compensation
JEL Codes: D57; G14; G32; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased boardroom centrality (G34) | decrease in beta values (C46) |
| increased boardroom centrality (G34) | higher directors' compensation (M12) |
| increased boardroom centrality (G34) | more similar compensation policies (M52) |
| lower analyst coverage and higher idiosyncratic volatility (G24) | greater benefit from increased centrality (D61) |
| increased boardroom centrality (G34) | positive abnormal returns (G12) |