Hostname: page-component-7bb8b95d7b-dtkg6 Total loading time: 0 Render date: 2024-09-06T09:36:12.921Z Has data issue: false hasContentIssue false
  • English
  • Français

Protecting Your Friends: The Role of Connections in Division Manager Careers

Published online by Cambridge University Press:  22 April 2024

Charles J. Hadlock Open the ORCID record for Charles J. Hadlock [Opens in a new window] ,
Jing Huang ,
Paul Obermann  and
Joshua R. Pierce
Charles J. Hadlock*
Affiliation:
University of Pittsburgh, Katz Graduate School of Business
Jing Huang
Affiliation:
Ernst and Young jing.huang@ey.com
Paul Obermann
Affiliation:
Idaho State University, College of Business paulobermann@isu.edu
Joshua R. Pierce
Affiliation:
University of Alabama, Culverhouse College of Business joshua.pierce@ua.edu
*
cjhadlock@katz.pitt.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We find that division managers who are connected to the CEO are substantially less likely than others to depart from the firm and are more likely to be promoted. Connected managers are protected when performance is poor, and they display no special ability to improve performance given this protection. Connections matter more in weak governance/incentive environments, and the external labor market and stock market appear skeptical of connected managers’ talents. While much of the evidence suggests inefficient favoritism, connected managers are protected more in peripheral segments, suggesting a possible efficiency benefit in helping to resolve intrafirm information problems.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 34
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank two anonymous referees, Anup Agrawal, Ran Duchin (the editor), Byoung-Hyoun Hwang, Lei Kong, Shawn Mobbs, Denis Sosyura, Dek Terrell, Xiang Zheng, and seminar participants at Auburn University, Babson College, Idaho State University, the Universities of Alabama, Connecticut, and Pittsburgh, the 2022 University of Alberta Frontiers of Finance Conference, and the 2023 Midwest Finance Association meetings for their helpful comments and suggestions. All errors remain our own.

References

Aggarwal, R. K., and Samwick, A. A.. “Performance Incentives Within Firms: The Effect of Managerial Responsibility.” Journal of Finance, 58 (2003), 1613–1649.CrossRefGoogle Scholar
Ai, C., and Norton, E. C.. “Interaction Terms in Logit and Probit Models.” Economics Letters, 80 (2003), 123–129.CrossRefGoogle Scholar
Ang, J.; de Jong, A.; and van der Poel, M.. “Does Familiarity with Business Segments Affect CEOs’ Divestment Decisions?” Journal of Corporate Finance, 29 (2014), 58–74.CrossRefGoogle Scholar
Bebchuk, L. A.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Bebchuk, L. A., and Kastiel, K.. “The Untenable Case for Perpetual Dual-Class Stock.” Virginia Law Review, 103 (2017), 585–630.Google Scholar
Berger, P. G., and Ofek, E.. “Diversification’s Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.CrossRefGoogle Scholar
Burks, S. V.; Cowgill, B.; Hoffman, M.; and Housman, Michael. “The Value of Hiring Through Employee Referrals.” Quarterly Journal of Economics, 130 (2015), 805–839.CrossRefGoogle Scholar
Cai, J.; Nguyen, T.; and Walkling, R.. “Director Appointments: It Is Who You Know.” Review of Financial Studies, 35 (2022), 1933–1982.CrossRefGoogle Scholar
Cichello, M. S.; Fee, C. E.; Hadlock, C. J.; and Sonti, R.. “Promotions, Turnover, and Performance Evaluation: Evidence from the Careers of Division Managers.” Accounting Review, 84 (2009), 1119–1143.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Co-opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.CrossRefGoogle Scholar
Duchin, R.; Goldberg, A.; and Sosyura, D.. “Spillovers Inside Conglomerates: Incentives and Capital.” Review of Financial Studies, 30 (2017), 1696–1743.CrossRefGoogle Scholar
Duchin, R.; Simutin, M.; and Sosyura, D.. “The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years.” Review of Financial Studies, 34 (2021), 700–762.CrossRefGoogle Scholar
Duchin, R., and Sosyura, D.. “Divisional Managers and Internal Capital Markets.” Journal of Finance, 68 (2013), 387–429.CrossRefGoogle Scholar
Engelberg, J.; Gao, P.; and Parsons, C. A.. “Friends With Money.” Journal of Financial Economics, 103 (2012), 169–188.CrossRefGoogle Scholar
Fee, C. E., and Hadlock, C. J.. “Raids, Rewards, and Reputations in the Market for Managerial Talent.” Review of Financial Studies, 16 (2003), 1311–1353.CrossRefGoogle Scholar
Fee, C. E., and Hadlock, C. J.. “Management Turnover Across the Corporate Hierarchy.” Journal of Accounting and Economics, 37 (2004), 3–38.CrossRefGoogle Scholar
Fee, C. E.; Hadlock, C. J.; Huang, J.; and Pierce, J. R.. “Robust Models of CEO Turnover: New Evidence on Relative Performance Evaluation.” Review of Corporate Finance Studies, 7 (2018), 70–100.CrossRefGoogle Scholar
Fee, C. E.; Hadlock, C. J.; and Pierce, J. R.. “New Evidence on Managerial Labor Markets: An Analysis of CEO Retreads.” Journal of Corporate Finance, 48 (2018), 428–441.CrossRefGoogle Scholar
Fos, V., and Tsoutsoura, M.. “Shareholder Democracy in Play: Career Consequences of Proxy Contests.” Journal of Financial Economics, 114 (2014), 316–340.CrossRefGoogle Scholar
Fracassi, C. “Corporate Finance Policies and Social Networks.” Management Science, 63 (2017), 2420–2438.CrossRefGoogle Scholar
Fracassi, C., and Tate, G.. “External Networking and Internal Firm Governance.” Journal of Finance, 67 (2012), 153–194.CrossRefGoogle Scholar
Gaspar, J., and Massa, M.. “The Role of Commonality Between CEO and Divisional Managers in Internal Capital Markets.” Journal of Financial and Quantitative Analysis, 46 (2011), 841–869.CrossRefGoogle Scholar
Giuliano, L.; Levine, D. I.; and Leonard, J.. “Manager Race and the Race of New Hires.” Journal of Labor Economics, 27 (2009), 589–631.CrossRefGoogle Scholar
Glaser, M.; Lopez-de-Silanes, F.; and Sautner, Z.. “Opening the Black Box: Internal Capital Markets and Managerial Power.” Journal of Finance, 68 (2013), 1577–1631.CrossRefGoogle Scholar
Gompers, P. A.; Ishii, J. L; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “Hiring Your Friends: Evidence from the Market for Financial Economists.” Industrial and Labor Relations Review, 74 (2021), 977–1007.CrossRefGoogle Scholar
Hadlock, C. J., and Schwartz-Ziv, M.. “Blockholder Heterogeneity and the Dance Between Blockholders.” Review of Financial Studies, 32 (2019), 4196–4227.CrossRefGoogle Scholar
Hayes, R. M.; Oyer, P.; and Schaefer, S.. “Coworker Complementarity and the Stability of Top Management Teams.” Journal of Law, Economics and Organization, 22 (2006), 184–212.CrossRefGoogle Scholar
Hoffman, M.; Kahn, L. B.; and Li, D.. “Discretion in Hiring.” Quarterly Journal of Economics, 133 (2018), 765–800.CrossRefGoogle Scholar
Hoitash, U., and Mkrtchyan, A.. “Internal Governance and Outside Directors’ Connections to Non-Director Executives.” Journal of Accounting and Economics, 73 (2022), 1–34.CrossRefGoogle Scholar
Hwang, B., and Kim, S.. “It Pays to Have Friends.” Journal of Financial Economics, 93 (2009), 138–158.CrossRefGoogle Scholar
Ishii, J., and Xuan, Y.. “Acquirer-Target Social Ties and Merger Outcomes.” Journal of Financial Economics, 112 (2014), 344–363.CrossRefGoogle Scholar
Kaplan, S., and Reishus, D.. “Outside Directorships and Corporate Performance.” Journal of Financial Economics, 27 (1990), 389–410.CrossRefGoogle Scholar
McPherson, M.; Smith-Lovin, L.; and Cook, J. M.. “Birds of a Feather: Homophily in Social Networks.” Annual Review of Sociology, 27 (2001), 415–444.CrossRefGoogle Scholar
Norton, E. C.; Wang, H.; and Ai, C.. “Computing Interaction Effects and Standard Errors in Logit and Probit Models.” Stata Journal, 4 (2004), 154–167.CrossRefGoogle Scholar
Pallais, A., and Sands, E.. “Why the Referential Treatment? Evidence from Field Experiments on Referrals.” Journal of Political Economy, 124 (2016), 1793–1828.CrossRefGoogle Scholar
Radean, M. “ginteff: A Generalized Command for Computing Interaction Effects.” Stata Journal, 23 (2023), 301–335.CrossRefGoogle Scholar
Rajan, R.; Servaes, H.; and Zingales, L.. “The Cost of Diversity: The Diversification Discount and Inefficient Investment.” Journal of Finance, 55 (2000), 35–80.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461–488.CrossRefGoogle Scholar
Shue, K. “Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers.” Review of Financial Studies, 26 (2013), 1401–1442.CrossRefGoogle Scholar
Topa, G. “Labor Markets and Referrals.” Handbook of Social Economics, 1 (2011), 1193–1221.CrossRefGoogle Scholar
Xuan, Y. “Empire-Building or Bridge-Building? Evidence from New CEOs’ Internal Capital Allocation Decisions.” Review of Financial Studies, 22 (2009). 4919–4948.CrossRefGoogle Scholar