Summary:
Social connections have historically played an important role in China. Many studies have examined the impact of executives' social networks or the connections between board members and CEOs on the firm's decisions. However, few studies have focused on the social connections within the executive team or demonstrated how the internal network structure impacts economic outcome. Top management team is responsible for the firm's operation and management. Therefore, studying the internal network connection of the team is crucial for understanding a company's decisions and behaviors. Social network theories have suggested that is teams whose members share a social background, such as alumni, form mutual trust and cooperation much easier, which benefits the overall exchange of information and resources. Studies on information asymmetry have pointed out that a lack of communication between team members negatively affects the quality of corporate decisions. The question remains whether the executives' internal social network affects the quality of a company's major decisions. Following studies on social network and information asymmetry, we empirically examine the effect of social connections within executive teams on the performance of their firm's M&A. We chose M&A for two reasons. (1) Corporate M&A has a significant impact on the firm's value, and it requires a high level of communication among management teams. (2) M&A has suitable exogeneity for our research design. We use the common work experience between executive team members as a proxy for internal social connections. We define network density as the number of real connections divided by the number of maximum possible connections between team members. Our results show that the executive team members with a higher network density communicate more effectively, thus leading to a higher M&A performance. Our main conclusions are robust after controlling for the endogenous issue, such as the potential omitted variables and selection bias issues. Further analysis suggest that the positive impact of executive network density on the M&A performance is more pronounced if the M&A involves greater risk, the firm's institutional environment is less developed, and the executive's tenure is shorter. Finally, we also find that firms with a higher executive network density have a better accounting and market performance after the M&A than other firms. The contributions of this study are as follows. First, our study advances the literature by examining the impact of social connections within executive teams on corporate decisions. We incorporate the network structure theory and its application from sociological research into the literature of M&A decision-making. We explorethe mechanism by which executives influence firms' operation from the perspective of the internal social connections. Second, our finding supports studies that analyze the impact of top management team characteristics on the quality of the M&A. We propose that the exchange of information between top management members can affect the outcome of an M&A. Finally, our study has practical implications for companies hiring a new executive, as the new executive will impact the social network. Due to time constraints, our study only focuses on the impact of the work-place social network on the firm's M&A. Future studies could explore different social networks among top management teams (e.g., alumni connections) and their impact on the firm's major decisions.
赵乐, 王琨. 高管团队内部网络与并购绩效[J]. 金融研究, 2020, 485(11): 170-187.
ZHAO Le, WANG Kun. Social Connections within Top Management Team and M&A Performance. Journal of Financial Research, 2020, 485(11): 170-187.
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