The Dark Side of CEO Networks: Evidence from Real Activities Management

Abstract We examine the relation between CEO network size and the level of real activities management (RAM). Using the number of social connections to outside executives, directors, and others in similar positions to measure network size, we find that well-connected CEOs associate with higher levels of RAM. Social science theory suggests that this occurs because well-connected CEOs can acquire more information from their social networks to implement RAM effectively. The power and influence and labor market insurance from a large network also reduces the private cost of RAM. Supporting these two channels, we find a stronger positive relation between RAM and CEO network size when the CEO connects with more informed and influential persons and has more reputation to protect in the labor market. In addition, the positive relation concentrates in firms with low CEO share ownership, where a more severe misalignment of interests can occur. We also show that higher but not extreme levels of RAM from a large CEO network degrades the firm’s long-term operating performance, suggesting that large CEO networks have a darker side for firm value