CEO Network In Finance

Abstract

This thesis examines how information flow among CEOs with social and professional connections affects firms and the market environment. Using biographical information about CEOs of U.S. public companies supplied by BoardEx from 2000-2016, the thesis relies on CEOs’ educational background, employment history and social activities (e.g., social clubs) to estimate the social and professional connections of CEOs as a measure of firms’ network size. The thesis then examines how networks among CEOs facilitate commonality in liquidity and commonality in asset growth among connected firms. The essay titled “CEO Connectedness and Commonality in Liquidity”, examines the effects of CEOs’ social and professional networks on stock liquidity commonality. We hypothesize that the stock liquidity of firms whose CEOs are connected will covary. In this essay, we uniquely construct our measure of commonality in stock liquidity among connected firms and provide strong evidence supporting the hypothesis. Outcomes reveal that the more connections firms share with each other, the more their stock liquidity comove. The essay further tests channels through which CEOs social and professional networks drive commonality in stock liquidity across connected firms. Results indicate that similarity in corporate finance policies and trading activities across connected firms are two channels through which CEOs’ personal connections drive liquidity covariation. We address endogeneity concerns and provide results that demonstrate that the magnitude of stock liquidity covariation among connected firms reduces when a CEO dies. The essay titled “CEO Peer Effects and Commonality in Asset Growth”, sought to investigate whether educational, social and professional networks among CEOs affect managerial asset growth decisions. We hypothesize that the asset growth rate of firms whose CEOs are connected will comove because of group thinking and peer influence. Using biographical information regarding CEOs of U.S. public firms from 2000 – 2016, the results suggest that CEO connectedness facilitates asset growth covariation. We conclude that a CEO is more likely to increase assets if peers in the network have recently done so leading to asset growth covariation across connected firms. Next, we test for channels through which CEOs’ connections may drive asset growth commonality across connected firms. The results reveal that commonality in asset growth decisions among connected firms stems from two possible channels: the adoption of related acquisition and research and development investment strategies. On the economic benefits of commonality in asset growth to shareholders, results show that commonality in asset growth across connected firms affects shareholders negatively. On endogeneity, tests indicate that the death of a CEO significantly reduces the extent of asset growth comovement between connected firms.