Author Abstract
Firms with well-connected ("central") boards of directors earn superior risk-adjusted stock returns. Initiating a long (short) position in the most (least) central firms earns an average risk-adjusted return of 4.68 percent per year. Firms with central boards also experience higher future growth in return-on-assets (ROA) with analysts failing to fully reflect this information in their earnings forecasts. Return prediction, growth in ROA, and analyst forecast errors are concentrated among firms with high growth opportunities or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms that stand to benefit most from the information communicated and resources exchanged through the network of board members. Overall, our results suggest that board of director networks provide economic benefits that are not immediately reflected in stock prices.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: August 2012
- HBS Working Paper Number: Rock Center for Corporate Governance at Stanford University Working Paper, No. 84
- Faculty Unit(s): Finance