Do Well-Connected Directors Affect Firm Value?

Abstract

Results have been mixed regarding whether, and how much, board of director connectedness is beneficial to firm value. Some prior research shows that overly busy directors are ineffective monitors, but these same “busy” directors can be valuable sources of information and other resources. For example, directors who are centrally located within a network can obtain information faster and those who are connected to other highly connected directors can access larger quantities of information. The information can take many forms including market trends, business innovations, and effective corporate practices and is available through these director network channels. However, increased information transfer speed (network centrality) and quantity (connections to highly-connected others) may not always balance out the negative effects of overcommitted directors, information overload, and the propagation of poor business practices. Using social network analysis, we investigate whether well-connected directors increase firm value and find that firms with well-connected directors have higher market value, after controlling for their operating cycle, investment opportunity sets and market competition. We also find that well-connected outside directors (independent) have a bigger impact on increasing firm value than well-connected inside directors.