Directors of corporations often sit on several boards, in a practice labeled ‘interlocking directorates.’ Policymakers and practitioners’ views of this phenomenon are ambivalent. Connections across the boardroom network may just be a manifestation of ‘crony capitalism’, providing powerful insiders with an opportunity for rent-seeking but reducing firm value as a result. At the same time, they may facilitate the flow of information, providing top decision-makers of the firm with timely information regarding suppliers, customers, competitors, or lenders. In this case, having well-connected board members may be beneficial for the firm value.

An influential theoretical literature on social network models (Stein 2008) shows that bilateral conversations among competitors who honestly exchange ideas within social networks can foster innovation, as relatively underdeveloped ideas can travel long distances over the network. In this case, being ‘central’ in the boardroom network can be beneficial to the value of the firm.

Unfortunately, assessing the causal effect of board connections on firm value is not straight- forward (See Fracassi and Tate 2012 and Cohen et al. 2008). For example, if well-connected board members sort into successful firms, this would result in a positive, but spurious, correlation between firm value and the presence of connected directors. However, it will tell little about the effect of interlocking directorates on firm value.

The effects of a ban on interlocking directorates

In Faia et al. (2020), we exploit a ‘ban’ on interlocking directorates, passed in December 2011 in Italy, which prohibits all firms in the insurance and finance industries to share board members. Hence, individuals sitting on multiple boards in these industries had to choose one board and resign from all the others. We find that, because of the regulation, 21 ties between firms were severed, directly affecting 24 out of the 272 firms listed on the Milan Stock Exchange at the time. The law affected, for example, the long-standing ‘alliance’ between two of the largest Italian banks, Mediobanca and Unicredit, which were sharing three board members prior to the legislation. In some cases, the effects of the policy were dramatic. In Milano Assicurazioni, a large insurance company, seven out of the 19 board members resigned as a result of the ban, as well as the entire three-member board of auditors.

To appreciate the impact of the regulation, Figure 1 illustrates the effects of the ban on interlocking directorships for the network of Italian companies at large. It plots the graph density (i.e. the number of observed links over the number of all possible links of the boardroom network at an annual frequency for the sample period 2009-2014) normalised by the total number of all possible links in a given year. It shows that network density has experienced a sharp decrease following the reform in 2011.

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Figure 1 Annual graph density of the firm network.

Given the importance of these industries (especially banks) among Italian firms, the ban had a widespread effect on the network of Italian listed corporations. In our paper, we focus not only on direct board linkages, but also on indirect ties. For example, even if firms do not share a director, they could still maintain connected indirectly by both sharing a board member with a third company. These ‘indirect’ linkages are also affected by the ban.

To perform our analysis, we build a new dataset with hand-collected information on board compositions and on executive compensation, matched with firms’ stock market values and financial characteristics. Following Hochberg et al. (2007) and El-Khatib et al. (2015), we construct a simple measure of ‘network centrality’ which captures the extent to which the directors of a firm are connected. A firm will be scored highly according to our proxy if it is connected to many firms, or if it is connected to a firm that is, itself, connected to many firms.

Based on the ties that each firm had before the ban, we can easily predict the change in firm centrality due to the law, as illustrated by a simple event study analysis. Figure 2 shows coefficients and 95% confidence intervals from regressing our network centrality proxy on year dummies multiplied by the predicted change in centrality that can be imputed solely to the law, after accounting for firm-invariant characteristics and time trends. The coefficients are small and insignificant for the years 2009 and 2010 whereas they increase significantly in the post-reform years 2012 through to 2014. Hence, there is no evidence of a ‘pre-trend’ in changes in network composition. Moreover, there is no apparent reversion after the reform. This suggests that the firms whose ties with other firms have been broken by the reform were unable to recover their centrality in the firm network.

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Figure 2 Predicting Network Centrality: Event Study Evidence

Firm value and compensation policies

The announcement of the law was unexpected. Thus, it provides us with an excellent opportunity to examine the stock market response of firms affected by this regulation. We find that firms expected to lose centrality because of the reform experienced a significant drop in valuation following the announcement of the ban on interlocking directorships. This suggests that board connections are perceived as valuable by market participants. Figure 3 plots the estimated coefficients for regressing abnormal firms’ returns on predicted network centrality along with 95% confidence intervals, after accounting for industry characteristics. The coefficients are close to zero for the days before the reform and increase around (and after) the announcement of the legislation, indicating that the timing of the change in market valuation coincides with the announcement of the policy.

Figure 3 The effect of network centrality on stock returns

We also show that the information channel plays a significant role. The effect we find is much stronger in firms with low analyst coverage, or for firms characterised by more uncertainty regarding their valuations. It is precisely these firms that need alternative channels of information transmission, such as those based on network connections.

Interesting insights are gained by exploring possible complementarities with other firms’ networks, specifically input-output production linkages and cross-ownership. Firms that operate in industries that are more central in the input-output network benefit more from boardroom centrality. This is because those firms are more exposed to upstream shocks, meaning that the flow of information passing through the boardroom allows them to be more hedged. This result has further-reaching implications, as it shows that the shock amplification uncovered in the literature on the micro origins of aggregate fluctuations can be mitigated through other types of connections (Gabaix 2011, Acemoglu et al. 2012, Carvalho and Gabaix 2013). Consistent with this hypothesis, network centrality appears to reduce firms’ exposure to market risk. In parallel, we also find that firms with lower cross-ownership centrality benefit the most from boardroom connections. Common ownership can be an effective coordination device (Azar et al. 2018) and can act as a substitute for board connections.

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Finally, as firms’ surpluses are shared between owners and executives, we explore the impact of network centrality on directors’ compensation, a topic which has attracted increasing attention due to the extraordinary rise in executive renumeration in recent years. We account for the endogeneity of the network formation by exploiting the reform in an instrumental variable setting. We find a positive and significant impact of firm centrality on compensation. Perhaps surprisingly, we find that all board members (not only the top executives) benefit from network centrality. The relation is due to rent sharing or improvements in executives’ outside options, arising from the larger sphere of influence. We also show that firms that are more closely tied in terms of board connections tend to adopt more similar compensation policies.


Overall, our results suggest that network connections are beneficial for firm value. However, it is important to point out that network centrality may not always translate into a gain for consumers. For example, board connections may favour collusive behavior, lowering competition and overall welfare. Hence, policymakers’ responses should be flexible enough to accommodate appropriate reactions in cases that may have different implications for consumers’ welfare.


Acemoglu, D, V Carvalho, A Ozdaglar and A Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations”, Econometrica 80(5): 1977–2016.

Azar, J, I Tecu and M Schmalz (2018), “Anticompetitive Effects of Common Ownership”, Journal of Finance 73(4): 1513–1565.

Carvalho, V and X Gabaix (2013), “The Great Diversification and its Undoing”,  American Economic Review 103(5): 1697–1727.

Cohen, L, A Frazzini and C Malloy (2008), “The Small World of Investing: Board Connections and Mutual Fund Returns”, Journal of Political Economy 116(5): 951–979.

El-Khatib, R, L Fogel and T Jandik (2015), “CEO Network Centrality and Merger Performance”, Journal of Financial Economics 116(2): 349–382.

Faia, E, M Mayer and V Pezone (2020), “The Value of Firm Networks: A Natural Experiment on Board Connections”, Centre for Economic Policy Research Discussion Paper No. DP14591.

Fracassi, C G and Tate (2012), “External Networking and Internal Firm Governance”, Journal of Finance 67(1): 153–194.

Gabaix, X (2011), “The Granular Origins of Aggregate Fluctuations”, Econometrica 79(3): 733– 772.

Hochberg, Y V, A Ljungqvist and Y Lu (2007), “Whom You Know Matters: Venture Capital Networks and Investment Performance”, Journal of Finance 62(1): 251–301.

Stein, J (2008), “Conversations among Competitors”, American Economic Review 99(5): 2150-2162.

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