The Impact of Directors’ External Connections on Firm Performance: An Empirical Analysis

Abstract

The paper examines whether and how directors’ external connections affect the operating performance of the firm for which they are board members. Using a large sample of directors and senior level executives, I map the social network of directors and executives, and construct a measure of directors’ external connections capturing how connected an individual director is to directors and executives of other firms. I find a positive association between the extent of directors’ external connections and firm performance. In addition, I find that firms experience efficiency gains through cost reductions in the presence of wellconnected directors. Overall, my findings suggest that directors’ external connections provide economic benefits to firms by increasing sales growth, lowering production costs, and improving firm profitability.