The impact of connections between the CEO and top executives on appointment, turnover and firm value

Abstract

We find that network connections with the CEO established outside the current firm positively impact the focal executive's career trajectory and job security, that is, are associated with increases in the likelihood of being appointed to the top management team and the board of directors, and reductions in the likelihood of turnover. We then show that there is a positive impact of these connections on firm value as measured by proxies for Tobin's Q. This latter finding contrasts with prior literature, that is, Fracassi and Tate (2012), which suggests connections between the CEO and directors reduce firm value. We believe our differential finding is driven by the distinct roles ascribed to directors and executives. That is, directors monitor CEOs, and consequently connections that are perceived to adversely impact their independence adversely impact the market value of the firm. In contrast, the executive team is expected to run the firm as a group. While the CEO is the leader of the group, she/he needs to work with the others in the group to run the firm efficiently. To the extent that connections within the group facilitate collaboration and communication, connections between the CEO and executives positively impact firm value.