Introduction Hypothesys and Methodology Results Conclusion

The Network Centrality of In�uential Bankers:a new Capital Structure Determinant

João Mergulhão (Universidade Nova de Lisboa)João Amaro de Matos (Universidade Nova de Lisboa)

Miguel Ferreira (Universidade Nova de Lisboa, European CorporateGovernance Institute)

Pedro Matos(University Southern California)

January 16, 2010

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

The paper in one slide

The presence of bankers-directors on the board and capitalstructure

In�uential bankers and capital structure

Social Network Analysis to measure in�uence

Role of Bankers in information transmission mechanism

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Outline

Introduction

Bankers and information asymmetrySocial Networks and information asymmetry

Social Networks and �nancial markets

Hypothesys and Methodology

Network construction and centrality measuresEstimation

Results

Summary

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Introduction

Bankers and Information Asymmetry

Banks as delegated monitors [Schumpeter (1939) andDiamond (1984)]

More e¤ective monitoring mechanism then loan covenants[Williamson (1998), Krozner and Strahan (2001)]

Banker-directors provide �nancial expertise [Mace (1971),Lorsh and MacIver (1989)]

Lower costs of funds [James (1987), Berger and Udell (1995);Fama (1985), Leland and Pyle (1997), Kracaw and Zenner(1998), Kroszner and Strahan (2001)]

Positive correlation between the �rm�s capital structure andthe presence of banker-directors [Byrd and Myzruchi (2005),Ciammarra (2006)]

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Introduction Hypothesys and Methodology Results Conclusion

Network Centrality

Social Networks and Information Asymmetry

Social relationships may prevent market failure[Podolny (1994)]

Social networks screen and select relevant information[Burt (1997)]

Social networks lower information-gathering costs[Nahapiet and Ghosal (1998)]

Creation and maintenance of information �ows increasesinformation set [Nohria (1992)]

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Network Centrality

Social Networks in Financial Markets

Politically connected boards add value to �rms [Goldman,Rocholl and So (2009)]

Social ties and venture capital [Shane and Cable (2002)]

Similar corporate investment decisions [Fracassi (2008)]

Fund managers portfolio decisions [Cohen, Frazzini andMalloy (2009)]

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Bankers in�uence and capital structure

Hypothesis 1 The presence of a banker on the board increases theleverage of a �rmHypothesis 2 The more in�uential a banker-director, the higherthe leverage of a �rmHypothesis 3 The higher the level of information asymmetry, thebigger the impact of the presence (or in�uence) of a banker on theleverage of a �rm

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Constructing the network

Board of Directors Data

BoardEx Reports

historical linkages between boards of di¤erent �rms

Information �ows between individualsConstruction of a new network

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Introduction Hypothesys and Methodology Results Conclusion

Constructing the network

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Constructing the network

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Constructing the network

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Measuring In�uence

Centrality Measures

Degree

Closeness

Betweeness

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Introduction Hypothesys and Methodology Results Conclusion

Measuring In�uence

Measuring In�uence: back to the �rm dimension

Aggregate the centrality measures to the �rm level.Bankers-directors: for each �rm, the corresponding centralitymeasure is the maximum value of the banker-director in the board.

If there is no banker-director, the centrality measure is 0.

1 Firm is covered by Boardex and has no banker seated on theboard

2 Firm is not covered by Boardex

We will assume that if we have information on the board size,then that �rm is covered by Boardex.

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Introduction Hypothesys and Methodology Results Conclusion

Financial Data

Merging �nancial and social network data

Financial data

Datastream, Compustat

Final sample

US �rms Listed in WorldScopefrom 2001 to 2006all variables are winsorized at 1% level.

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Introduction Hypothesys and Methodology Results Conclusion

Financial Data

Estimation

LRt+1,i = β0 + β1Sizet ,i + β2Pro�tabilityt ,i + β3Asset Tangibilityt ,i+β4Asset Speci�cityt ,i + β5Growth Opportunitiest ,i+δBankert ,i+γ1Industry Dummiest ,i + γ2Year Dummiest

LRt+1 : Leverage ratio= Total debtMaket capitalization

Size : log (sales)

Asset Tangibility : Tangible AssetsTotal Assets

Asset Speci�city: R&D expensesTotal Sales

Pro�tability: Return on Assets

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Introduction Hypothesys and Methodology Results Conclusion

Financial Data

Estimation

LRt+1,i = β0 + β1Sizet ,i + β2Pro�tabilityt ,i + β3Asset_Tangibilityt ,i+β4Asset_Speci�cityt ,i + β5Growth_Opportunitiest ,i+δBankert ,i+γ1Industry_Dummiest ,i + γ2Year_Dummiest

Banker

the presence of banker on the board (hypothesis 1)centrality measures (hypothesis 2)

RES 5th PhD Presentation Meeting

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Introduction Hypothesys and Methodology Results Conclusion

Financial Data

Estimation

LRt+1,i = β0 + β1Sizet ,i + β2Pro�tabilityt ,i + β3Asset_Tangibilityt ,i+β4Asset_Speci�cityt ,i + β5Growth_Opportunitiest ,i+δ1Bankert ,i + δ2Bankert ,i �Opacityt ,i+γ1Industry_Dummiest ,i + γ2Year_Dummiest

Opacity (hypothesys 3) :

SizeTangibilityRatingS&P500Illiquidity: Amihud�s (2002)Illiquidity measureAccruals quality: Dechow and Dichev (2002)

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Introduction Hypothesys and Methodology Results Conclusion

Financial Data

Endogeneity

Board composition and capital structure are simultaneouslychosen

OLS fails with endogenous regressors.IV is not a solution for endogenous binary regressors (Imbensand Angrist 1994, Angrist, Imbens and Rubens 1996)

Solution: Average Treatment E¤ectsInstruments: Board size, Size, Leverage, Market to Book, AssetTangibility

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Introduction Hypothesys and Methodology Results Conclusion

Results

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Results

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Results

RES 5th PhD Presentation Meeting

Universidade Nova de Lisboa

Introduction Hypothesys and Methodology Results Conclusion

Conclusion

We study relation between the presence of bankers on boardsand capital structure.

Presence of bankers in the board increases the leverage ratio

E¤ect is magni�ed by the in�uence of the banker

E¤ect of banker�s social infuence on the leverage ratioincreases with �rm�s opacity

role of bankers on the information transmission mechanism.

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