Speaker
Description
Companies can achieve their objectives by drawing on social relationships. One form of social relationships found at the disposal of a company are those held through the means of its directors’ affiliations. Thus, this study sets out to establish whether or not board affiliations have a positive impact on corporate financial performance. We make use of the extensive financial and non-financial data provided by LSEG Refinitiv Eikon and of the powerful analysis tools offered by STATA. The primary methods of analysis are instrumental variable regression, in the form of two stage least squares (2SLS) and generalized method of moments (GMM). The analysis begins with ordinary least squares (OLS) analysis and it provides results in accordance with our hypothesis. However, due to Granger causalities among our dependent and independent variables, the OLS findings are biased. In order to solve this shortcoming, we make use of 2SLS, as its results are robust to reciprocal influences among variables. Yet again, 2SLS results are supportive of our main hypothesis. The results are supported by Variance Inflation Factor (VIF) robustness analysis, thus suggesting multicollinearity is not an issue. However, as shown by the Jarque-Bera normality test, our variables lack normality, thus 2SLS results face a bias. Our solution for this bias is found within the appliance of GMM, as the use of the dependent’s first lag ignores issues related to the lack of normality. A final series of robustness – bias analyses refer to the appliance of cross section dependency tests. These underline the fact that there exists cross section dependence among our data. In order to overcome this final challenge, we adapt our GMM model so that it includes either industry fixed effects, or time fixed effects, in addition to standard errors made robust with respect to Windemeijer finite-sample correction. The obtained results show a positive and statistical impact of board affiliations on corporate financial performance, whilst controlling for company size, leverage, reputation and employee productivity. The results have strategic and governance implication for corporate actors. First of all, attracting those directors that present enhanced human and social capital places the company in a position from which it can capitalize both on its directors’ knowledge and on their social ties to other companies. Secondly, a director that serves more than one board provides conclusive proof for expertise and mastery of current work practices, thus enabling affiliated companies to mutually gain competitive advantages.
