Abstract
Considering the important role of connections in corporate governance quality, this review paper has investigated the effectiveness of corporate, social, and political connections on corporate governance practices. In general, the findings of this research show that networking activities in various forms positively and negatively affect corporate governance practices. As far as corporate connections are concerned, there is no consensus on the relationship between interlocked boards and firm performance. Moreover, interlocking boards are positively associated with the propagation of some governance malpractices such as earnings manipulation and options backdating. Regarding social connections, the evidence provides contradictory results regarding the effects of social ties on CEO compensation and firm performance. Finally, as for political connections, the findings related to the impact of political connections on corporate decisions and firm value are mixed. Furthermore, politically connected firms pay lower taxes; have more access to credit markets; and enjoy governmental contracts. Additionally, in some cases, political ties are positively associated with corrupt activities
Highlights
We live in a small world where every two random persons could be connected to each other by a short chain of separate individuals or short social distances (Kogut, 2012; Milgram, 1967)
As far as corporate connections are concerned, there is no consensus on the relationship between interlocked boards and firm performance
There is no consensus on the relationship between interlocked boards and firm performance
Summary
We live in a small world where every two random persons could be connected to each other by a short chain of separate individuals or short social distances (Kogut, 2012; Milgram, 1967). Some literature exists in support of the negative impact of social networking on board independence and monitoring quality It provides some evidence regarding the association of corruption with social connections. Agrawal and Knoeber (2001) discussed that in corporations with higher trading levels with governments, political connections are considerably linked to firm performance and such companies often have directors with political experience and background on their boards. The results of this research can inform the corporate decision-makers of the advantages and disadvantages of engaging in networks so that they can have a better understanding of the types of connections and the associated conditions that best suit their firms and can create wealth for their shareholders.
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