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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
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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)]
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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
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
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
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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.
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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.
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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
Universidade Nova de Lisboa
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)
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa
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
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
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.
RES 5th PhD Presentation Meeting
Universidade Nova de Lisboa