CEO关联、社会资本与企业投资

CEOs’ Connectedness, Social Capital, and Corporate InvestmentbyConghui Hu1, Yu-Jane Liu21Peking 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 InvestmentAbstractThis 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).There are several plausible ways that social capital can facilitate a firm’s access to external financing found in various research areas. First, according to the resource-based view, social capital constitutes a valuable organizational resource (Burt, 1997; Granovetter, 1985; Lin, 2001) because it facilitates access to broader sources of information and improves information quality, relevance and timeliness (Nahapiet and Ghoshal, 1998; Gulati, 1999; Adler and Kwon, 2002). Therefore, CEOs with greater social capital tend to expand the accessible resources of the firm by exploiting personal resources. Second, social capital could mitigate information asymmetry between corporate insiders and outside investors (Boyd, 1990; Uzzi, 1999). This would greatly reduce the cost of external financing, which would encourage the CEO to utilize external financing when making investment decisions. Third, social capital can act as a bonding mechanism that helps firms obtain or retain business relationships (e.g., banker, customer, supplier) especially when they are experiencing a shortage of working capital (Uzzi, 1999; Stuart et al., 1999).This paper defines social capital as the sum of the actual and potential resources embedded within, available through, and derived from, the connections possessed by an individual (Nahapiet and Ghoshal, 1998).2Connectedness is a vital aspect of social capital and manifested in different types of groups from local community, to sports clubs and credit groups, and to work unit. Career experiences or past occupations are important ways for CEOs to accumulate connections and build up social capital. We construct connectedness measures from CEOs’ career experiences to investigate the relationship between CEO’s social capital and investment and financial decision-making. Similar methods have got widespread use in organization and strategy studies. Geletkanycz and Hambrick 2The definitions of social capital vary depending on whether their focus is primarily on (1) the relations an actor maintains with other actors, (2) the structure of relations among actors within a collectivity or both types of linkages (Adler & Kwon, 2002). A focus on external relations is known as “bridging” forms of social capital, whereas a focus on internal ties within collectivities emphasizes “bonding” forms of social capital.(1997) trace executives’ work experiences in other firms/industries to calculate the total number of executives’ external ties. Haynes and Hillman (2010) introduce“board capital breadth” and “board capital depth” to explore how board capital affects a firm’s strategic change, in which directors’ social capital is captured through directors’ current or former occupations in other firms or industries. Overall, these studies indicate that career experiences reveal an individual’s external social capital, and CEOs with more diversified career experiences are likely to possess more external connections and social capital. 3Specifically, we construct two kinds of connectedness measures from CEOs’ previous work experience.4The first kind of variables are measured by the number of firms (industries) for which the CEO has worked. A CEO who has worked in different firms builds external social capital in the form of connectivity to former contacts, associates and other directors/executives and tends to retain these external communication links. Similar to the measurement in social network literature (Engelberg, Gao and Parsons, 2009), the greater the number of links a CEO possesses, the greater the heterogeneity and scope of his/her social network is. This kind of variable provides a direct measure of the diversity of a CEO's career experiences and aims to indicate the CEO's overall connectedness. The other kind of variables reflect whether a CEO has a few typical career experiences, such as work experience in government, financial institutions or research institutes, to reflect the social capital that the CEO obtained from such particular experiences. While most studies document the impact of 3 Career background information become more adopted in recent finance studies. A growing literature explores the economic implications of social ties between firms (Schmidt, 2009; Cai and Sevilir, 2012; Ishii and Xuan, 2010) or within a firm (Hwang and Kim, 2009; Fracassi and Tate, 2012) on corporate governance, M&A activities and so on. These studies highlight that Managers or directors are socially connected through the experience of working together, though, they are economically or familial independent.4Admittedly, one might want to interpret our measures as a reflection of a CEO’s human capital. It is true that skill and expertise in handling relations with various parties gained from diversified career experiences can help the firm have better access to outside financing. This paper cannot distinguish the effect of social capital from human capital. In fact, in sociology literature it is well-recognized that human capital and social capital can be transformed into each other and it is difficult distinguish between them (Coleman, 1988; Nahapiet and Ghoshal, 1998).political connections or finance backgrounds on corporate policies (e.g. Faccio et al., 2006; Fan and Wong, 2007; Guner, Malmendier and Tate, 2008), our paper highlights the effect of research experience on corporate decision-making.We explore the role of a CEO’s social capital in corporate investment and financing decision-making using a Chinese sample. The China market, as one of the largest emerging markets in the world, provides a promising context to empirically explore the link between a CEO’s social capital and corporate financial policies for the following reasons. First, the impact of individual managerial decisions is stronger when the governance environment in a country is weaker (Adams, Almedia, and Ferreira, 2005). Due to poor corporate governance and underdeveloped market discipline in China (Shleifer and Vishny, 1997; La Porta et al., 1998; Claessens et al., 2002; Claessens and Fan, 2002; Fan et al., 2011), CEOs will have a powerful influence over their firms’ investment and financing decisions. In this case, our sole focus on the role of the CEO is reasonable in analyzing how the exact decision process works within a firm.Second, because of a lack of market-oriented institutions, managers and firms may rely on Guanxi to obtain market information, organize resources and enforce contracts. In an environment where formal institutional constraints such as laws and regulations are weak, informal institutional constraints, such as those embodied in interpersonal ties (guanxi in China), may play a more important role in facilitating economic exchanges. For example, Allen et al. (2005) observed that China’s growth is instead supported by corporate governance mechanisms that are financed through relationship and reputation, rather than by formal legal and financial systems. As a result, we expect that participants in China’s market are more dependent on interpersonal ties and that a CEO’s social capital, as a firm’s intangible asset, exerts a significant impact on corporate financial policy. It istherefore of interest and importance to explore the role of the CEO in corporate financial policies using emerging market data.Overall, we find that the investments of CEOs who have more diversified career experiences (well-connected CEOs) are less sensitive to internal cash flow than the less diversified ones. Specifically, the dependent variable is investment. The coefficients of the interaction term of the diversity of CEOs’ career experiences and cash flow are highly significant for all of connectedness measures. The documented negative relationship between CEOs’ connectedness measures and investment-cash flow sensitivity remains significant even when controlling for investment opportunities, corporate governance, other observable CEO characteristics and firm fixed effect.The two explanations for the existence of investment-cash flow sensitivity are agency conflict between shareholders and management (Jensen, 1986) and asymmetric information between insiders and the capital market (Myers and Majluf, 1984). Determining which distortion is more prevalent is an empirical matter. While there is some controversy, most empirical literature agrees that investment-cash flow sensitivity is at least partly due to imperfections in the capital market or financial constraints (Fazzari et al. 1988, 2000; Hubbard, 1998; Hovakimian, 2009). That is, expensive external financing due to asymmetric information may prevent firms from investing in good projects when there are insufficient internal funds. If this is the case, we conjecture that career experience-based social capital should alleviate a firm’s financial constraints. By separating firms according to three priori measures of financial constraints (including a firm’s tangibility, credit loan ratio and proprietary nature), we find supporting evidence that the negative relationship between CEOs’ connectedness measures and the sensitivity of investment to cash flow are stronger in financially constrained firms. This finding indicates that CEOs’ connectedness is more important forfirms confronted with financial constraints. Furthermore, by investigating whether the investment-cash flow sensitivity varies according to two dimensions of financial constraints and corporate governance, our research can shed some lights on which kind of investment distortion is more prevalent in Chinese market. The results show that the positive correlation between investment and cash flow is more pronounced in firms perceived as financially constrained, but we cannot find systematic differences of investment-cash flow sensitivity with respect to the quality of corporate governance. This finding suggests that generally the investments of Chinese listed firms are subject to information asymmetry rather than agency problem.As auxiliary evidence, we want to investigate whether well-connected CEOs exploit more external financing. For the following reasons, we only focus on firm leverage to compare firms’ actual amount of external financing in China. First, obtaining bank loans is a very important financing channel even for listed firms (Allen et al. 2005; Berger et al., 2009). Second, firms issuing rights offerings are required to meet strict standards with respect to earnings and profitability, but few firms confronted with financial constraints are qualified for seasoned equity offerings in China. We indeed find that the level of firm leverage is positively related to CEOs’ connectedness measures, which confirms that the well-connected CEO has an advantage in obtaining external financing.For robustness checks, we take two approaches to address the endogeneity concern. Some firms may strategically hire well-connected CEOs to gain a competitive edge, so a CEO’s career experiences in a specific firm could be endogenous. We, thus, apply the Heckman (1978) two-stage treatment effect procedure to mitigate the endogeneity concern of these CEOs’ connectedness measures. After correcting for selection bias, the conclusion is qualitatively the same as previously: the CEO’s connectedness is negatively related to the investment-cash flow sensitivity but positivelyrelated to the level of firm leverage. Second, we exploit exogenous shocks on firms’ financing condition (the change of total credit by the Central Bank of China) to further test our hypothesis. The analysis based on exogenous shocks further mitigates the endogeneity concern of the CEO appointment. We find that firms with well-connected CEOs are less affected by the changes in credit policies, indicating the role of a CEO’s social capital plays in alleviating exogenous financing difficulty.This paper contributes to the growing “managers matter” literature by documenting that career experience-based social capital can reduce the dependence of investment on internal funds and thus mitigate financial constraints. Prior research in this area mainly focuses on how a CEO’s psychological factors (e.g. overconfidence, risk taking) influence corporate decisions and firm value. For example, Malmendier and Tate (2005, 2008) find that overconfident CEOs have a heightened sensitivity of investment to cash flow and are more likely to undertake value-destroying mergers. Graham, Harvey and Puri (2010) provide additional evidence that corporate decisions are related to a CEO’s personal traits such as risk aversion and optimism, based on psychometric tests. There are also findings on a CEO’s general ability in private equity firms being related to success (Kaplan, Klebanov, and Sorensen, 2011), and on military experience, depression era upbringing (Malmendier, Tate, and Yan, 2011) and a CEO’s personal leverage in recent primary home purchases (Cronqvist, Makhija and Yonker, 2012) relating to a firm’s capital structure.Our paper is also related to another growing body of literature that explores the economic implications of social connections in finance. Some studies identify the important role of social interactions in asset pricing. Information transfer through social interactions such as word-of-mouth communication among friends and neighbors and shared education networks can affect investmentdecision making, for both fund managers and households (e.g. Hong, Kubik and Stein, 2004, 2005; Cohen, Frazzini and Malloy, 2008, 2010; Han and Hirshleifer, 2012). The theoretical model of Han and Yang (2012) further demonstrate that social communications could reduce information acquisition and thus have a negative effect on market efficiency, liquidity, and asset prices. In the fields of corporate finance, studies have found that well-connected firms make better acquisition decisions (Schonlau and Singh, 2009), that politically connected firms have a higher likelihood of receiving bailout assistance (Faccio, McConnell, and Masulis, 2006), that firms with bank connections receive more favorable terms of financing (Engelberg, Gao and Parsons, 2012), and that companies that are socially connected exhibit similar corporate financial policies (Fracassi, 2011). In contrast to these studies, we focus on the overall connectedness of a specific person (CEO) rather than the social connection between firms. We show that a CEO’s social capital, measured by the connectedness reflected in their career experiences, can reduce information asymmetry and financing frictions, and assist firms in obtaining more financing.The remainder of the paper is organized as follows. In section I, we derive empirical predictions relating a CEO’s connectedness measures constructing from his/her career experiences to investment and financing decisions. Section II describes our research design and discusses the construction of our key variables. Section III introduces our sample and reports summary statistics. Section IV reports the empirical results and discusses the explanations of our evidence. Section V tests the robustness of our main results. Section VI provides a conclusion.I. Hypothesis DevelopmentA. CEOs’ connectedness and external financingUpper echelon theory (Hambrick and Mason, 1984) suggests that managers’ experiences affecttheir cognitive biases and values, and therefore affect their corporate decisions. Burt (1997) and Granovetter (1995) show that the social capital embodied in managerial ties and networks does matter. Consistent with these arguments, prior research has provided strong evidence that executives’ external ties play a critical role in shaping strategies, as well as in shaping overall firm performance (Geletkanycz and Hambrick, 1997; Peng and Luo, 2000; Acquaah, 2007). Moreover, the value of executives’ external networks has been reflected in executive compensation (Geletkanycz, Boyd and Finkelstein, 2001; Engelberg, Gao and Parsons, 2009). All this evidence indicates that a CEO’s social capital constitutes a valuable organizational resource.Social capital facilitates access to broader sources of information and improves information quality, relevance and timeliness (Boyd, 1990; Uzzi, 1999; Adler and Kwon, 2002). As a result, corporate policy decisions are affected by CEOs’ accessible resources. We argue that CEOs who possess greater social capital are less likely to be constrained by the insufficiency inside the company because of better access to outside resources. Accordingly, the optimal investment in firms where CEOs possess greater social capital is less likely to be affected by the insufficient internal funds.Career experience is an important way to accumulate social capital. CEOs who have worked in different firms bring with them knowledge gained through personal experiences with other firms’ policies and practices, relationships with former contacts and associates (Granovetter, 1988) and retained external communication links (e.g., Visrany, Tushman, and Romanelli, 1992). The CEO’s diverse work experiences help to build external social capital in the form of connectivity to other directors and executives. Oh et al., (2006) document that CEOs who are broadly connected to outside groups will have greater social capital because they have quick access to timely information, diverse ideas, and critical instrumental, political, and emotional resources. Furthermore, the CEOs’ previouscareer experiences that are less related to their firm’s networks (e.g. a CEO’s non business experience or former occupations in other industries) are likely to have a greater marginal contribution to expanding the firm’s social capital (Nahapiet and Ghoshal, 1998; Lin, 2001, Collins and Clark, 2003). Moreover, empirical research in strategy and organization usually constructs the measures of social capital from one’s current and past career experiences (Nahapiet and Ghoshal, 1998; Hillman and Dalziel, 2003; Haynes and Hillman, 2010). For example, a CEOs’ external directorships and an outside director’s participation in multiple boards are well-studied forms of social capital (Mizruchi, 1996; Geletkanycz and Boyd, 2011). Haynes and Hillman (2010) introduce “board capital breadth” and “board capital depth” to explore how board capital affects a firm’s strategic change. Namely, a director’s social capital is captured through interlocking directorates and current or former occupations in other firms or industries. Based on prior research,we propose that a CEO’s career experience reveals his/her external networks, and a CEO who has more diversified career experiences possesses more external connections and thus social capital.A CEO’s social capital obtained from career experience facilitates the firm’s access to external financing in following ways. First, greater social capital could expand the sources of external financing, ranging from formal finance, leasing, and credit trade to strategically introducing private equity investors and informal finance. Second, social capital can act as a bonding mechanism to mitigate uncertainty/information asymmetry between corporate insiders and outside investors. This greatly reduces the cost of external financing which, to some extent, encourages firms to utilize external financing when making investment decisions. Consistent with this argument, certain literature explicitly consider the role of social capital on start-up resource acquisition. For example, Burton et al. (2002) suggest that entrepreneurs with prior career experiences in more prominent firmsare likely to obtain information and status advantages with measurable effects in both acquiring external financing and sourcing innovative new ventures. In addition, Shane and Stuart (2002) find that entrepreneurs with social capital (pre-existing direct or indirect ties with venture capitalists) enjoy a higher likelihood of receiving venture funding in its early stages. Overall, CEOs who have more diversified career experiences possess more external connections and thus social capital, enabling a firm to obtain more external financing at relatively lower cost. This in turn allows the firm to be less dependent on internal funds in financial decision making. In other words, CEOs’ connectedness mitigates the relationship between investment and internal funds. We propose the investment of CEOs who have more diversified career experiences (well-connected CEOs) is less sensitive to internal cash flow than the less diversified ones.Hypothesis I: the investment of CEOs who have more diversified career experiences (well-connected CEOs) is less sensitive to internal cash flow than the less diversified ones.B. Investment-cash flow sensitivity and financial constraintThe empirical literature, beginning with Fazzari et al., (1988), confirms the existence and robustness of investment-cash flow sensitivity controlling for investment opportunities. The two traditional explanations for investment distortions are agency conflict between shareholders and management (Jensen, 1986) and asymmetric information between corporate insiders and the capital market (Myers and Majluf, 1984). In an agency view, managers tend to reap private benefits from empire-building activities and therefore the investment increases with internal free cash flow. Under asymmetric information, good investment opportunities may be rejected because external financing may be deemed by the management to be overly expensive. In this case, underinvestment problems prevail. Managers increase the investment only if they have sufficient internal funds. As a result,determining which distortion is more prevalent is an empirical matter. While there is some controversy5, most empirical literature relate investment-cash flow sensitivity to imperfections in the capital market (Fazzari et al. 1988, 2000; Hubbard, 1998; Hovakimian, 2009). In this case, the reduced sensitivity of investment to cash flow for firms with well-connected CEOs implies that CEOs’ connectedness could mitigate financial constraints.Furthermore, we could infer that CEOs’ connectedness only matters when a firm is confronted with financial constraints. If a firm has a sufficient amount of internal funds to finance all the CEO’s desired investment projects, then CEOs’ connectedness may not affect the investment-cash flow sensitivity. If a firm must instead access the capital market (through either debt or equity) for additional finance, career experience-based social capital should have an impact on the sensitivity of investment to cash flow. As argued previously, CEOs’ connectedness can help reduce financing friction and obtain more and less expensive external resources that can be used in undertaking positive-NPV projects. However, the investment behavior of financially unconstrained firms would not be affected since they have already reached their optimal level of investment. In other words, the relationship between corporate investment and internally generated cash flows will be more affected by CEOs’ connectedness in financially constrained firms. Therefore, if investment-cash flow sensitivity is associated with financial constraints, we propose the following hypothesis: Hypothesis II: The negative relationship between CEOs’ connectedness and the sensitivity of investment to cash flow will be stronger in more financially constrained firms than in less financially constrained firms.5 Kaplan and Zingales (1997) challenge the validity of investment-cash flow sensitivity as an indicator of financial constraints. Actually, Cleary et al. (2007) reconcile the seemingly contradictory findings of Fazzari et al. (1988) and those of Kaplan and Zingales (1997). They stress the importance of the classification frictions. When firms were not financially distressed, the investment cash-flow sensitivity is expected to increase in terms of the financing frictions encountered. In our paper, we only focus on firms which are less likely to suffer from financial distress problems.II. Research DesignA. Measures for CEOs’ connectednessConstructing reasonable measures for unobservable manager attributes poses the main empirical challenge for the research in this area.6 One promising but neglected source is a CEO’s career experiences. Academic research in strategy and organization have shown that top team demographic information including tenure, functional experiences, outside experiences and so on affect a firm’s strategy choice as well as its overall organizational performance (e.g. Hambrick and Mason,1984; Hambrick, 2007).Guided by the empirical measures in strategy and organization literature, we construct two different types of variables to capture the social capital embodied in a CEO’s career experiences. We manually collected biographical data for the CEOs, focusing on detailed information on all current and past positions in the CEO’s professional career, including positions outside listed firms from yearbooks and supplemented their employment histories with information in finance websites.One type of variable including three proxies as discussed below provides a direct measure of the diversity of a CEO's career experiences and aims to indicate the CEO's overall connectedness. First, we measure a CEO’s #firm as the number of firms the CEO has worked for throughout his/her career reflected in his/her curriculum vitae. We include both the focal firm where he/she serves as CEO and any other concurrent occupations held in other firms (e.g. board directors at other corporations). The number of firms in which the CEO has had experiences is calculated in two different ways. In the first method (#firm), we count the different firms in the same business conglomerate as one firm. In 6Malmendier et al. (2005, 2008, and 2011) form a manager-level proxy for overconfidence based on the propensity for a manager to voluntarily hold in-the-money stock options in his own firm. Cronqvist, Makhija, and Yonker (2012) use a CEO’s mortgage behavior in a home purchase to predict their firm’s leverage. Other studies rely on the survey data of CEOs (Graham et al., 2010; Kaplan et al., 2012).。