Interlocking Directorates within Business Groups: Information Matters!

Abstract

This study aims at disentangling the decision of interlocking directors along the hierarchy of business groups. We consider boards as information-processing groups and argue that, following agency theory and resource dependence theory, monitoring and advising functions are better achieved through interlocks. Analyzing an international sample of 847,085 boards’ positions, our model empirically checks that two contingent factors -geographic and institutional distance between headquarters and affiliates in business groups- and industrial diversification strategy, as barriers of information, hinder the decision of interlocking directors. Furthermore, we find that there are characteristics of business groups -such as ownership links and the position of affiliates- that influence this decision. Our contribution is threefold. First, our research contributes to the alignment of corporate governance and business groups’ literature, by studying the composition of their boards. Second, we contribute to the literature of information processing barriers through a cost-benefit analysis of the interlocking decisions inside business groups. Third, we offer a new methodology on the empirical identification of business groups.