CEO Networks and Shareholder Value

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Herman Sahni; Suresh L. Paul
CEO networks; Executive Compensation
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paper description
In this paper, we study the importance of social networks in the CEO labor market. Specifically, we examine whether (i) CEO networks enhance their pay; and (ii) the mechanism by which CEO networks increase pay is due to enhancements in firm productivity. We use CEO educational networks and find support both of these suppositions. First, we find that a one standard deviation increase in network connections is associated with a three percentage points increase in total pay and a one percentage point increase in firm value. That is, for a representative CEO, an increase in the number of network connections by 18 is associated with a $160,000 increase in total pay and $220 million increase in firm value. To rule out the systematic pay variations that arise from degree-specific training or university-specific training, we re-run the pay model with degree and university fixed effects and find qualitatively similar results. Further, our results are robust to alternate specifications of CEO networks - dummies that represent well-connected CEOs (90th network percentile or more) and CEOs connected with well-connected CEOs, and by including other firm-based governance measures.