Corporate Finance Policies and Social Networks

Social network theory suggests that individuals’ preferences and decisions are affected by the actions of others. Such decision externalities arise from constraints on our ability to process or obtain costly information. This paper provides evidence that managers are influenced by their social peers when making corporate finance policy decisions. I create a matrix of social ties using data on current employment, past employment, education, and other activities for key executives and directors of the board for US companies. I find that the more social connections two companies share with each other, the more similar both their level and change over time in investment. Furthermore, companies positioned more centrally in the social networks invest in a less idiosyncratic way. Finally, more socially connected firms exhibit better economic performance. To address endogeneity concerns, I find that two companies behave less similarly when an individual who connects them dies.