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Management connectedness and corporate investment

Mahmoud Agha, Man Pham and Jing Yu

Journal of Banking & Finance, 2021, vol. 124, issue C

Abstract: In response to the mixed views about the appointment-based connectedness between CEO and subordinate C-level executives, we systematically analyze the net effect of top management team (TMT) connectedness in the context of real corporate investment activities. We document a robust negative association between TMT connectedness and corporate investments, driven by the reduction in corporate R&D spending and acquisitions. Further tests show investment inefficiency in firms with closely connected managers, suggesting an average weak governance effect of TMT connectedness. To explain such an effect, we find that connected executives tend to avoid risky investments and shirk investment responsibilities when facing little career concerns. Interestingly, the agency cost and coordination benefit of interconnected TMT are not mutually exclusive. The adverse investment effect of TMT connectedness tempers in firms facing financial constraints and even reverses during the Global Financial Crisis when financial constraints are most likely binding.

Keywords: Corporate investments; Management connectedness; Corporate governance (search for similar items in EconPapers)
JEL-codes: G31 G34 M12 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:124:y:2021:i:c:s0378426620303034

DOI: 10.1016/j.jbankfin.2020.106042

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