The Value of Firm Networks: A Natural Experiment on Board Connections (March 2023)

joint with Ester Faia and Vincenzo Pezone
Reject & Resubmit Review of Corporate Finance Studies

We present causal evidence on the effect of boardroom networks on firm value and compensation policies. We exploit a ban on interlocking directorates of Italian financial and insurance companies as exogenous variation and show that firms that lose centrality in the network experience negative abnormal returns around the announcement date. The key driver of our results is the role of boardroom connections in reducing asymmetric information. The complementarities with the input-output and cross-ownership networks are consistent with this channel. Using hand-collected data, we also show that network centrality has a positive effect on directors’ compensation, providing evidence of rent sharing.

The paper is also available as:
SAFE Working Paper No. 269
CEPR Discussion Paper No. 14591
Read non-technical summary on VoxEU