Governance network externality: Exploring systemic risk generation mechanisms

Abstract

We show three potential stages in transforming corporate debt default risk to systemic risk in an interlocking directorate network: network contagion of corporate debt default risk, network transformation, and network cascade of systemic risk. In addition, based on the arguments of ‘too connected to fail’ and ‘too big to fail’ in the scope of systemic risk, nodes with higher network connectivity and larger asset scale can significantly improve the efficiency of risk contagion, transformation and cascade in the network. Finally, a significant risk spillover effect exists between the real and financial sectors. From the perspective of corporate internal governance, we confirm that corporate ‘governance connections’ represented by the director network are crucial in transforming micro corporate risks to macro systemic risks and analyzes the whole process of systemic financial risks from endogenous outbreak to diffusion and finally accumulation and outbreak.