Boardroom Networks and the Cross-Section of Stock Returns

Abstract

Board directorships link organizations and directors forming a complex, continuously evolving corporate boardroom network. Using a novel and unique comprehensive monthly boardroom network dataset for the Netherlands, home to one of the largest and most liquid European stock markets, this paper finds that a firm’s connectedness in this network is a strong predictor of subsequent risk-adjusted monthly stock returns. Consistent with a weakened corporate governance hypothesis, the paper documents a negative impact on future returns for firms with relatively well-connected directors. And consistent with an access to resources hypothesis, the paper finds a positive impact for firms that are relatively well-connected through inter-board ties. Importantly, while past director ties are informative for future returns, past inter-board ties are not. Fama-MacBeth regressions suggest the results are not confounded by other board characteristics. Connectedness is also systematically mispriced in analysts’ forecasts. Taken together, the findings strongly suggest that boardroom networks simultaneously exert distinct positive and negative effects through complex corporate governance, informational and other channels.