Speaker: Hisham Farag, Professor of Finance, University of Birmingham

Abstract

What effects do directors’ connections and networks have on risk-taking? Using data from the financial sector in the UK, we provide empirical evidence that directors’ networks have a negative impact on risk-taking behaviour. We also find a positive market perception and better performance associated with directors’ connections and networks. However, our results reveal that connected directors- though offered generous compensation packages- do not necessarily lead to higher stock abnormal performance. We argue that connected directors may have incentives to change the operating characteristics of their companies and hence make less risky decisions. Our paper extends the debate on the downside of connections. We carried out rigorous tests to mitigate any endogeneity concerns and find consistent results. Beyond insights for regulators the study provides useful guidelines for shareholders and wider stakeholder groups.