Board Centrality and Firm Performance: Evidence from Private Firms

Abstract

Boardroom centrality, measured by directorship interlocks, positively influences future firm performance in private firms. The centrality-performance relationship is stronger for private firms, where the reductions in information asymmetry through increased connectedness are likely to decrease transaction costs and open new business opportunities thus increasing profitability and growth. Private firms with central boards also have better employee productivity and hoard less cash. Sub-sample analyses further reveal that networks are crucial for both distressed and young firms. This is consistent with better-connected directors providing firms with informational resources when they need them the most. Alternative explanations are discussed and further causal evidence is provided on the impact of board centrality on performance. Overall, the findings suggest that boardroom interlocks are positively associated with immediate economic benefits in private firms.