Directors’ Social Networks and Firm Efficiency: Astructural Embeddedness Perspective

Abstract

The performance of firms is usually influenced by their structural embeddedness in social networks. This paper investigates the effects of structural hole positions of directors on their firms’ operating and investing efficiency,from a corporate finance perspective. We build an interlocking network of the directors in Chinese listed companies, and compute the network constraint index to represent the richness of structural holes in this network. The empirical results show that firms with more structural holes are more efficient in both operating and investing activities (through the channel of reducing their firms’ under-investment problems), and these relations are more pronounced in competitive industries. Further tests find that firms with more structural holes perform better over time. The results suggest that a firm’s ‘structural hole position’ plays an important role in firm efficiency. These findings provide new evidence for the emerging literature of social networks and corporate finance.

Keywords: board network, investing efficiency, operating efficiency, social network, structural hole

JEL Classification: G30, L14, M00