Session Chair: Bang Nguyen, University of Cambridge
Friends During Hard Times: Evidence from the Great Depression
Diego Garcia1, Tania Babina2, Geoffrey Tate3
1University of Colorado Boulder; 2Columbia University; 3UNC Chapel Hill
Discussant(s): Shawn Mobbs (University of Alabama)
We test whether network connections to other firms through executives and directors increase value by exploiting differences in survival rates in response to a common negative shock. We find that firms that had more connections on the eve of the 1929 financial market crash have higher 10-year survival rates during the Great Depression. Consistent with a financing channel, we find that the results are particularly strong for small firms, private firms and firms with small cash holdings relative to the sample median prior to the shock. Moreover, connections to cash-rich firms are stronger predictors of survival, overall and among financially constrained firms. Because of the greater segmentation of markets in the 1920s and 1930s than in modern data samples, we can mitigate the potential endogeneity of network connections at the time of the shock by exploiting variation in the local demand for directors’ services. We also find evidence that the information that flows through network links increases the odds that a firm will be acquired.
The Value of Labor Networks to Managers and Firms
Isaac Hacamo, Kristoph Kleiner
Discussant(s): Quoc-Anh Do (Sciences Po)
We examine the effect of labor networks on employment outcomes of middle-level managers, and whether these networks benefit or harm the firm’s acquisition of talent. To identify labor networks, we use exogenous connections established by a sample of workers that graduated from the MBA program at Indiana University from 1999 to 2013. These connections arise due to the random assignment of students into groups. We establish that a middle-level manager is significantly more likely to join a prestigious firm if her connection has prior employment experience with that firm, especially if her network is weak otherwise. Using measures of ability that are unobservable to potential employers, we find that firms also benefit, since they consistently hire a high-ability (rather than a low-ability individual) through labor networks. More generally, we determine a firm’s dependency on labor networks is primarily driven by geographic distance, while managers continue to rely on these networks for the first five years after graduation. Overall, our findings suggest that networks can improve hiring outcomes for both middle-level managers and their employers.
This paper uses a social network framework to study information dissemination during activist campaigns. Actively managed funds whose managers are socially connected to the lead activist are more likely to increase their ownership in the target firm around the activist disclosure, and the likelihood is higher when the activist has a better track record. Connected institutions also earn significantly higher returns relative to non-connected funds. Connected funds as a whole substantially increase their holdings in the target, and their presence contributes to the activist's campaign success. Additional tests are performed to rule out alternative explanations such as fund manager ability or similarity in portfolio choices. This study contributes to the understanding of alliance building in hedge fund activism.