The Effects Of Interlocking Directorates On Firm PerformanceAnd CEO Compensation

Social and economic networks are a central feature of virtually all economic activities.These networks serve as a conduit for interpersonal and inter-organizational support,influence,and information flow.One important network in corporate finance is the network formed by interlocking directorates.Interlocking directorates is those individuals who simultaneously sit on boards of multiple companies,which are frequently observed in Chinese listed firms.In this thesis,I seek to add to prior literature by theoretically analyzing and empirically testing the economic consequences of interlocking directorate networks on firm performance,and the setting of CEO compensation package.I employ a sample of Chinese listed firm over the period from 1999 to 2011,and come up the standard centrality to capture the network position of a firm being networked by interlocking directorates.I find that(1)central firms earn significant higher future stock returns than non-central firms;central firms experience significantly higher increases in accounting profitability than non-central firms;the centrality-performance relationship is less pronounced in firms ultimately controlled by central government,and less pronounced in firms that are located in eastern region,but more pronounced in firms with more growth opportunities than their corresponding counterparts.(2)Firms that are more networked by interlocking directorates award higher payments to their CEOs,but exhibits lower pay-performance sensitivity;the centrality-compensation relationship is less pronounced in firm that are ultimately controlled by central government,and in firm with better corporate governance;while the impact of network position on pay-performance sensitivity is more pronounced in firms who have better corporate governance.(3)The evidences that provide the strong support of RPE in a weak-form test when peer group is defined as those firms sharing directors,even after controlling the performance of market peers,industry peer and industry-size peers;the usage of RPE based on interlocking firm peers is less pronounced in firms that are ultimately controlled by central government but more pronounced in firms with a main foreign investor(s)than their counterparts.This thesis mainly contributes to existing literature in four ways as follows:First,this dissertation considers different dimensions of interlocking directorates network by using standard centrality measures: degree,closeness,betweenness and eigenvector centrality,which incorporate not only the number of interlocking directorates held by a firm but also the importance of these interlocks.In contrast,most of the prior studies in this line just focus on the existence or the number of interlocking directorates in a given firm;they are unable to fully capture a firm's network position in a boardroom network.Second,this dissertation focuses on the economic consequence of interlocking directorates in the unique context of China.On one hand,it is a long observation that Chinese society Chinese society's emphasis on interpersonal relationships as guiding structure in economic and social organization.On the other hand,China is gonging through the widely economic reform and institutional transition,which leads to institutional voids.Building on the features,I develop a referral model and an institutional argument to explain the relationship between centrality and performance.In contrast,most of prior studies in this literature rely on the Resource Dependence Theory or Busyness Director Hypothesis,both of which are developed in the western context and inappropriate to be generalized to Chinese context.Third,this dissertation provides strong evidence on the economic consequences of Chinese interlocking directorates by employing a long period sample from 1999 to 2011.I accurately and completely describe the full picture that where and how a firm is embedded in the annual network of interlocking directorates.Prior literature often restricts their sample to one region or one industry due to the cost of sample collection,and artificially decomposes a network into small components and hence results in measure errors.Such identification strategies have inability to provide robust conclusions.Further.The limitation in prior literature is highlighted by the absence of identifying causal associations.In contrast,this dissertation relatively rules out the alternative explanations by multiple identification strategies.Fourth,this dissertation fully evaluates the balance of benefits and costs related to network of interlocking directorates.Specifically,this thesis,on one hand,finds that central firms exhibit better performance;on the other hand,shows that being network through interlocking directorates impairs the board's ability of governance,and hence award a relatively high payment to their CEOs.Further,this thesis is one of the few,if not the first,to provide the direct evidences on that interlocking firms are more likely to be selected as peers in the usage of RPE of the focal firm,suggesting that information associated with setting CEO compensation are transmitted within an interlocking directorate network.