Firm Social Network, Information Transfer and Information Environment

I investigate whether or not a firm’s social network size (also known as social
capital) impacts the quality of its information environment. Following social capital
theory, I posit three potential channels that help bring an informational advantage to wellconnected
firms. First, well-connected firms are likely to have timely access to a broader
set of information that affords them the opportunity to disclose this information. Second,
a social network fosters trust among social peers, which promotes the transfer of more
accurate information within that network. Third, well-connected executives and directors
have greater reputational capital at stake, which may encourage them to provide accurate
information to the market. I provide evidence that well-connected firms have higher
quality information environments.
I further document that the beneficial impact of the firm’s social network size on
the quality of the firm’s information environment is higher for complex firms. I also find that the beneficial effect of the firm’s social ties on the quality of the firm’s information
environment is greater when the firm’s connections are in the same industry or are top
executives or are industry leaders or are financiers in the capital markets.
My study extends existing social network literature by investigating whether
firm’s social connections to outside executives and directors impact the quality of the
firm’s information environment. My paper focuses on the networking skills of the
executives and directors and extends the literature on how executives’ and directors’
personal characteristics are important. Additionally, I respond to the call by Engelberg et
al. (2013) to identify the mechanism by which a CEO’s network creates value to the firm
and well-connected CEOs get paid higher compensation. This study also contributes to a
growing debate in social network literature between social capital theory and agency
theory. Finally, my study is important to the regulators and standard setters as they can
provide further evidence on the impact of non-financial information on the information
quality surrounding the firm.