Outside Directors' Social Capital and Firm Performance: A Complex Network Approach

This paper investigates whether the social capital of outside directors has an impact on firm performance and value, using a sample of 480 outside directors from 125 large publicly traded Korean companies. In order to measure social capital, we map out the social networks of outside directors on the basis of their personal affiliation in terms of educational and career backgrounds. Then, we apply betweenness centrality and closeness centrality — two commonly used complex network analysis measures — to capture the social capital of individual outside directors. A review of existing literature leads us to propose two competing hypotheses: one that posits a positive relationship between boards’ social capital and firm performance and another that posits a negative relationship between the two. The results of our empirical examination report a negative impact of outside directors’ social capital on firm performance and value.