Boardroom Centrality and Stock Returns

Firms central in the interlocking boardroom network earn superior risk-adjusted stock returns. Initiating a long position in the most central firms and a short position in the least central firms earns an average risk-adjusted return of 4.68% per year. Firms with central boards also experience higher future growth in return-on-assets (ROA) with analysts failing to fully reflect this information in their earnings forecasts. Return prediction and growth in ROA are concentrated among young, high growth, low ROA, and low momentum firms. These types of firms are also more likely to experience large increases in boardroom centrality, consistent with the hypothesis that firms most likely to benefit from network connections increase their network centrality. Together, our results suggest that board of director networks provide economic benefits that are not immediately reflected in stock prices.