A University of Arkansas study suggests that the more socially connected a chief executive officer is, the less success his firm experiences.
The study, by Tomas Jandik, associate professor of finance in the UA’s Sam M. Walton College of Business, found that CEOs with extensive social connections to board members, executives at other firms, bankers and other financial market participants initiate more mergers and acquisitions but with poorer results.
The study also found these deals result in greater financial losses for both the acquiring firm and the combined entity but greater personal benefit to the well connected CEO.
“As you might expect, an individual’s position in the social network matters,” Jandik said in a UA news release. “But this positioning doesn’t necessarily lead to financial gains for the firms they lead. We show that CEOs with higher network centrality – those who are highly connected socially – are more likely to pursue acquisitions, and that these deals are more likely to destroy value.”
Jandik and colleagues Kathy Fogel at Suffolk University and Rwan El-Khatib at Zayed University in United Arab Emirates used BoardEx data to construct a social network of CEOs at U.S. firms, according to the UA. BoardEx provides biographical information on board members and senior executives around the world and uses information on work, educational and other social relationships to document organizations’ connectivity to the marketplace.
The data allowed the researchers to determine the overall importance or power of individuals within the network of nearly 400,000 U.S. corporate officers and directors. The researchers’ analysis relied on the graph theory concept of network centrality, which studies many alternative aspects of “connectedness” – not just the number and relevance of CEO connections, but also how short a path the CEO has to other individuals, the UA said.
The researchers examined centrality in the context of mergers and acquisitions by S&P 1500 firms from January 2000 to December 2009, and found that a CEO’s individual authority and dominance over others achieved through being at the center of the social network has a mostly negative impact in the merger and acquisition process.
Compared to CEOs with fewer connections, the highly connected CEOs used their power and influence to launch deals more frequently. But these mergers and acquisitions generated mostly negative stock returns for the bidder firm’s shareholders and often lowered the combined value of the merged firms.
“CEOs are often lauded for being influential and well connected,” Jandik said. “And yes, personal networks can be very beneficial as they provide an effective channel for the exchange of information. What we found, though, is that highly connected executives can also use their influence to become entrenched and to pursue activities regardless of the potentially negative impact on shareholders. This should be an important concern for corporate boards and other market participants, especially in cases of multi-billion dollar deals.”
The study, “CEO Network Centrality and Merger Performance,” is forthcoming in the Journal of Financial Economics.
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