Social Networks in The Boardroom

This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a large dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) firm and directors' fixed effects and (2) matching of firms and director along one observable and one unobservable characteristic. We then turn to real effects of such network activity. We find that firms where these networks are most active are less likely to change CEO when they underperform. This suggests that social networks in the board room impair corporate governance.

Collateral Value and Corporate Investment: Evidence from the French Real Estate Market

This paper is an empirical study of the effect of shocks to firms' collateral, with a focus on land holdings. We find evidence that stand-alone French firms are credit constrained. They invest up to .39¬ more per extra euro of collateral, and they finance this additional investment by issuing more debt. This result is obtained by looking at the specific case of the Ile de France real estate bubble of the 90s, which we use as a natural experiment providing exogenous variations in land value. Consistent with the view of efficient internal capital markets, we find that the effect collateral on corporate investment is limited to stand-alone firms.Internal financial markets, real estate bubble

Regulating Systemic Risk through Transparency: Tradeoffs in Making Data Public

Public or partial disclosure of financial data is a key element in the design of a new regulatory environment. We study the costs and benefits of higher public access to financial data and analyze qualitatively how frequency, disclosure lag and granularity of such open data can be chosen to maximize welfare, depending on the relative magnitude of economic frictions. We lay out a simple framework to choose optimal transparency of financial data.

Credit and Product Market Effects of Banking Deregulation: Evidence from the French Experience

Bankenreform, Deregulierung,, Industriestruktur, Frankreich, Banking reform, Deregulation, Industrial structure, France

Social networks in the boardroom

This paper provides empirical evidence consistent with the facts that (1) social networks may strongly affect board composition and (2) social networks may be detrimental to corporate governance. Our empirical investigation relies on a unique dataset on executives and outside directors of corporations listed on the Paris stock exchange over the 1992-2003 period. This data source is a matched employer employee dataset providing both detailed information on directors/CEOs and information on the firm employing them. We first find a very strong and robust correlation between the CEO's network and that of his directors. Networks of former high ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account (1) differences in unobserved directors' abilities and (2) the unobserved propensity of firms to hire directors from particular networks, irrespective of the CEO's identity. We then show that the governance of firms run by former civil servants is relatively worse on many dimensions. Former civil servants are less likely to leave their CEO job when their firm performs badly. Secondly, CEOs who are former bureaucrats are more likely to accumulate directorships, and the more they do, the less profitable is the firm they run. Thirdly, the value created by acquisitions made by former bureaucrats is lower. All in all, these firms are less profitable on average

Going for broke: New Century Financial Corporation, 2004-2006

Using loan level data, we investigate the lending behavior of a large subprime mortgage issuer prior to its bankruptcy in the beginning of 2007. In 2004, this firm suddenly started to massively issue new loans contracts that featured deferred amortization ("interestonly loans") to high income and high FICO households. We document that these loans were not only riskier, but also that their returns were more sensitive to real estate prices than standard contracts. Implicitly, this lender dramatically increased its exposure to its own legacy asset, which is what a standard model of portfolio selection in distress would predict. We provide additional evidence on New Century’s lending behavior, which are consistent with a risk shifting strategy. Finally, we are able to tie this sudden change in behavior to the sharp monetary policy tightening implemented by the Fed in the spring of 2004. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions.

The WACC Fallacy: The Real Effects of Using a Unique Discount Rate

We document investment distortions induced by the use of a single discount rate within firms. According to textbook capital budgeting, firms should value any project using a discount rate determined by the risk characteristics of the project. If they use a unique company-wide discount rate, they overinvest (resp. underinvest) in divisions with a market beta higher (resp. lower) than the firm's core industry beta. We directly test this consequence of the WACC fallacy and establish a robust and significant positive relationship between division-level investment and the spread between the division's market beta and the firm's core industry beta. Consistently with bounded rationality theories, this bias is stronger when the measured cost of taking the wrong discount rate is low, for instance, when the division is small. Finally, we measure the value loss due to the WACC fallacy in the context of acquisitions. Bidder abnormal returns are higher in diversifying mergers and acquisitions in which the bidder's beta exceeds that of the target. On average, the present value loss is about 0.7% of the bidder's market equity.Investment, Behavioral finance, Cost of capital