Director Networks, Mobility, and Governance: Evidence from Corporate Bankruptcies

We exploit a quasi-natural experiment to identify the importance of professional connections in determining a firm's board composition. At the individual level, directors who share work experiences with the executives/directors of bankrupt firms experience on average a 6-percentage-point decline in their likelihood of finding new board positions within a year of bankruptcy filing, even though they have not held positions at any bankrupt firms themselves. At the firm level, bankruptcy-induced network shocks not only reduce interlocking directorates across different industries, but also change board composition: the number of independent directors and new directors on the board decreases while director tenure increases. Firms with less mobile directors, however, show improvements in shareholder rights and monitoring.