The Wealth of Networks: Board Networks and Merger Performance

Abstract

Are better networked boards better positioned to increase shareholders' wealth? We investigate this question in the context of merger activities. Using director information and acquisition activity of U.S. publicly traded firms from1990 to 2005, we find that better networked firms have significantly better post-merger performance. The calendar time portfolios reveal annual abnormal return differences of 5-10% between central and peripherally networked boards. This finding is supported by a 12% increase in 3-year buy-and-hold abnormal returns. We also find that board networks significantly explain which firms will acquire other firms, which firms will be acquired by others, and when cash will be used as the method of payment. The results are robust to a number of controls and model specifications.