CEO Network Centrality and Merger Performance

Abstract

We use director relational data from BoardEx to construct social networks of executives and directors of US public companies and calculate four measures of network centrality: Closeness, Degree, Betweenness and Eigenvector centrality for each individual connected into such network. CEOs with higher levels of network centrality may obtain more private information from their social contacts, which could translate to better decision-making on the job (private information hypothesis). On the other hand, more centrally positioned CEOs may derive influence and power from being well-connected and thus be more insulated from disciplinary actions brought about by the corporate control market and the executive labor market (managerial entrenchment hypothesis). By studying outcomes of M&A’s, we introduce evidence that supports the managerial entrenchment hypothesis. More centrally positioned CEOs are more likely to bid for other publicly traded firms, and these deals carry greater value losses to the acquirer, and greater losses to the combined entity. Stronger corporate governance in the form of intensive board monitoring, non-CEO Chairman, and block ownership at the bidder company can partially mitigate such effects. Following the CEOs and their firms five years after their first value-destroying deals, we find that firms run by more centrally positioned CEOs withstand the external threat from market discipline. Moreover, the managerial labor market is less effective in disciplining centrally positioned CEOs because they are more likely to find alternative, well-paid jobs. Ultimately, we show that CEO personal networks can have their “darker side” - well-connected CEOs may become powerful enough to pursue any acquisitions, regardless of the impact on shareholder wealth.