It pays to have friends

Byoung-Hyoun Hwang and Seoyoung Kim

Journal of Financial Economics, 2009, vol. 93, issue 1, 138-158

Abstract: Currently, a director is classified as independent if he or she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay-performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter and that, consequently, a considerable percentage of the conventionally independent boards are substantively not.

Keywords: Board; independence; Social; ties; Executive; compensation (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (305)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:93:y:2009:i:1:p:138-158

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