CEO关联、社会资本与企业投资

CEOs’ Connectedness, Social Capital, and Corporate Investment

by

Conghui Hu1, Yu-Jane Liu2

1Peking University, Guanghua School of Management, Beijing, China, 10087, Phone: 86-10-62749803, fax:

86-10-62753590, e-mail: huconghui@.

2Peking University, Guanghua School of Management, Beijing, China, 10087, Phone: 86-10-62757699, fax:

86-10-62753590, e-mail: yjliu@.

CEOs’ Connectedness, Social Capital, and Corporate Investment

Abstract

This paper aims to investigate the impact of CEOs’ career experiences on corporate investment decisions. Specifically, we propose that a CEO's social capital facilitates the firm’s access to external resources and also mitigates information asymmetry between managers and outsiders, enabling a firm to become less dependent on internal funds. Consistent with this argument, by constructing connectedness measures from CEOs’ career experiences we find that the investment of CEOs who have more diversified career experiences (well-connected CEOs) is less sensitive to internal cash flow than less diversified ones. We also find evidence that social capital embodied in the diversity of CEOs’ career experiences does alleviate a firm’s financial constraints, confirming the well-connected CEOs' advantage in obtaining external financing.

Does social capital matter in corporate decision-making? Granovetter (1985) and Lin (2001) point out that social capital constitutes important channels for the transfer of informational and social influences that help to shape managers’ frames of reference, thus affecting the policies adopted by firms. The importance of a manager’s external social capital on the policies adopted by firms has also been well-documented in strategy and organization literature (Geletkanycz and Hambrick, 1997; Peng and Luo, 2000; Hillman and Dalziel, 2003; Haynes and Hillman, 2010; Geletkanycz and Boyd, 2011). Unfortunately, in finance literature, there is a missing chapter on whether a manager’s social capital influences a firm’s investment and financing decisions and how it could do so.

Recently, some finance scholars started to pay attention to the influence of manager-specific attribute on firm behavior. In their seminal contribution to the “manager matters” literature, Bertrand and Schoar (2003) document that a manager’s fixed effects are important determinants of a wide range of corporate decisions. Inspired by their work, many financial economists provide evidence that a CEO’s psychological factors (e.g. overconfidence and risk-taking) have influence on corporate decisions and firm value (Malmendier and Tate, 2005, 2008, 2011; Graham, Harvey and Puri, 2010; Cronqvist, Makhija, and Yonker, 2012)1.

Previous literature studies how psychological factors affect a manager’s perception and thus affect corporate financial policy. Complementarily, this paper aims to investigate the impact of a CEO’s social capital obtained from his/her past occupations on a firm’s investment and financing decisions. We propose that a CEO's social capital facilitates the firm’s access to external resources and also mitigates information asymmetry, enabling a firm to become less dependent on internal funds.

1 One possible reason why previous research in behavioral corporate finance has paid little attention to career background is that their focus has been on the psychological factors of managers, however, demographic traits are treated as weak approximations of cognition (Barr et al., 1992; Markoczy, 1997).