Boardroom Centrality and Systematic Risk

Abstract

We find that boardroom centrality formed by sharing directors across firms can significantly increase firms’ systematic risk. This positive effect is stronger when the shared directors also sit on the boards of other large firms or of firms included in the stock market index. It is also stronger when boardroom centrality is formed by inside executive directors or more experienced directors. Further corroborating these inferences, we find that boardroom centrality increases the accounting fundamental and corporate policy correlations between the appointing firm and other firms in the market. Furthermore, firms with higher boardroom centrality demonstrate significantly less idiosyncratic corporate behavior. Finally, we find that boardroom centrality is positively associated with firms’ cost of equity. These results remain robust after addressing endogenous issues using identification based on exogenous changes in directorship outside the focal firm. Overall, these findings highlight the important roles of corporate leaders in affecting firms’ systematic risk.

Keywords: accounting beta; social network; information transfer; cost of equity

JEL Classification: G30; M41; L14