Essays on Board of Directors’ External Connections

The two essays in this dissertation study issues related to the board of directors’ external connections, i.e., social ties to directors and executives of other firms. The first essay examines whether and how directors’ external connections affect the operating performance of the firm for which they are board members. Using a large sample of 393,481 directors and executives from 7,627 companies over the time period from 2000 to 2010, I map the social network of directors and senior level executives, and construct a measure of directors’ external connections capturing how connected an individual director is to directors and executives of other firms. I find a positive association between the extent of directors’ external connections and firm performance. In addition, I find that firms experience efficiency gains through cost reductions in the presence of well-connected directors. Overall, my findings suggest that directors’ external connections provide economic benefits to firms by increasing sales growth, lowering production costs, and improving firm profitability. The second essay investigates whether directors’ external connections influence director compensation and appointment. Drawing on my findings in the first essay, I argue that the external connections of directors are reflected in labor market outcomes for directors. Consistent with prior literature, I find that directors’ external connections are positively associated with the level of their compensation and that directors with more extensive external connections earn more than those with more limited external connections. I then examine the impact of directors’ external connections on director appointments. Using the subsample of directors who departed as a director of one firm during the period from 2003 to 2010, I examine whether directors’ external connections impact the likelihood of being selected as a new director at another firm. I find that the extent of a director’s external connections increases the likelihood that he/she will obtain a new directorship at another firm, suggesting that external connections play an important role in director selection process. Collectively, this dissertation provides empirical evidence that relational capital captured in directors’ external connections provides access to valuable resources and information to the firm, thereby enhancing its financial performance, and has significant impact on labor market outcomes for directors in the form of director compensation and director appointment