Date of Graduation

5-2012

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Finance

Advisor

Tomas Jandik

Committee Member

Timothy Yeager

Keywords

Social sciences; Acquisitions; Mergers; Network centrality; Shareholder activism; Social networks

Abstract

There is a recent strand of corporate finance literature that explores the impact of executives and directors' Social connections on firm value, performance, and governance. Those studies document that such Social connections could be beneficial when they enhance the sharing of information and knowledge, but could also be detrimental when associated with CEOs, as they could provide the CEO with a source of influence that makes her more entrenched and powerful.

In the first essay, I use four common measures of network centrality to compute the position of the CEO within the Social network of all executives and directors of US public companies. This differentiates this study from previous research as it focuses on the overall connectedness of CEOs rather than studying the effect of bilateral Social connections across executives, directors, or firms. Furthermore, I investigate the determinants of such CEO network centrality. I find that graduating from an "elite" university, having a prior career path in a publicly listed firm, serving on the board of directors of other S&P firms, and being successful in the past career path positively increases a CEO's position in the Social network. However, spending a longer period of time in the career prior to holding the CEO position, and being more optimistic decreases the CEO's position in the Social network. Finally, I investigate the impact of such CEO network centrality on the firm's overall valuation, performance, and CEO compensation. I find that increases in CEO network centrality after holding the CEO position increases the firm's value when measured by market to book ratio, doesn't significantly increase the firm's accounting performance when measured by ROA, and significantly increases the CEO's compensation.

In the second essay, I examine the impact of CEO network centrality on M&As which are considered to be one of the most important events that adversely impact the value of firms, and in which the CEO plays a crucial role in exploiting any power that she could have as a result of her influential central position in the Social network. I find that in the specific context of M&A's, higher CEO network centrality increases the frequency of mergers, and not only creates losses to the acquirer shareholders but also decreases total expected synergies. This evidence is consistent with the managerial entrenchment hypothesis; more centrally positioned bidder CEOs are insulated from both the disciplinary market for corporate control and the executive managerial labor market.

Finally, in the third essay, I study the M&A's from a different angle, to examine how external governance acts when the internal governance fails to act. Shareholder activism is an excellent area to do such investigation, as numerous studies document evidence regarding the relevance of shareholder activism to internal governance, but only a few studies explore the impact of shareholder activism on external governance. I find that shareholder activism, measured by the presence of shareholder proposals, shareholder votes in favor of a proposal, and the participation of shareholders in voting on the proposal, significantly increases the probability of a firm becoming a target of a subsequent completed acquisition. At the same time, target companies with previous shareholder proposals earn significantly less cumulative abnormal returns around the merger announcement compared to targets with no proposals. One potential channel that facilitates such functioning of the market for corporate control when internal governance fails to act is the common share ownership. I find the highest effect of takeover probability when the proposal sponsors in the target firm are also owners in the bidder firm.

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