Managerial connections and corporate risk-taking: evidence from the Great Recession

Abstract

In this paper we analyze the relationship between managers’ connections, corporate risk-taking and corporate performance during a period of crisis. Using the Great Recession of 2007–9 as a laboratory experiment, we show that corporate equity volatility increased substantially for firms operating in sectors severely affected by this crisis. We also show that this effect was greater for firms with well-connected managers and that these firms adopted riskier corporate policies. However, further results suggest that managers’ connections also helped firms to recover to their precrisis levels of performance faster.