We investigate the impact of CEO networks on bank risk during the recent financial crisis and test whether CEO networks have a bearing on CEO insider trading at the onset of the crisis. We construct a unique dataset of CEO networks based on 97 bank CEOs' social ties, which allows us to assign a Social Network (SN) score to each CEO. Our results provide evidence that CEO networks in 2006, the year prior to the financial crisis, are related to bank risk-taking ex post during the financial crisis. We also find that after controlling for bank and other CEO characteristics, a higher SN score is associated with lower bank risk. In addition, the CEO social network effect is magnified with CEO power, indicating that a well-connected bank CEO uses his internal dominance to influence corporate risk choices, and hence undertake less risk during the financial crisis. Furthermore, CEO social networks have a significantly positive impact in reducing CEOs' personal wealth loss in the wake of the financial crisis. Overall, our results suggest that CEO social networks provide an efficient information channel to bank CEOs.
Jackon, D., & Fang Fang. (2014). CEO Networks and Bank Risk Taking. Banking & Finance Review, 6(1), 37–53.
Banking and Finance Review