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Is Good Advice Hard to Find?: The Impact of Director Connectedness on Financing and Investment

We explore the effect of director connectedness on firms’ investment and financing activities. Our evidence suggests that well-connected directors are more effective advisors, with outside and inside directors playing different roles. Outside directors have better information regarding external factors such as industry trends and policy changes, all of which are important when evaluating investment decisions. Results suggest that during competition shocks and changes in economic policy uncertainty, well-connected outside directors have greater influence on investment decisions than inside directors. Outside director connectedness also has a more pronounced effect on a firm’s R&D outcome than inside director connectedness. Connected inside and outside directors have similar impact on the market reaction to acquisition activity, indicating that all well-connected directors are associated with mergers that are perceived to be more valuable. However, well-connected inside directors play a prominent role in lowering firms’ financing costs, particularly when information asymmetry is high.