The Value of Firm Networks: A Natural Experiment on Board Connections

This paper presents causal evidence of the effects of boardroom networks on firm value. We exploit exogenous variation in network centrality arising from a ban on interlocking directorates of Italian financial and insurance companies. We leverage this shock to show that firms that become more central in the network as a result of the shock experience positive abnormal returns around the announcement date. We find that information dissemination plays a central role: results are driven by firms that have higher idiosyncratic volatility, low analyst coverage, and more uncertainty surrounding their earnings forecasts. We also find that firms benefit more from boardroom centrality when they are more central in the input-output network, as this reinforces information complementarities, or when they are less central in the cross-ownership network, as well as when they suffer from low profitability and low growth opportunities. Network centrality also results in higher compensation for board directors.