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The economic effect of interlocking directorates in Italy: new evidence using centrality measures

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Abstract

We use measures of vertex centrality to examine interlocking directorates and their economic effects in Italy. We employ centrality measures like degree, eigenvector centrality, betweenness, and flow betweenness, along with the clustering coefficient. We document the existence of a negative relationship between both degree and eigenvector centrality and firm value. Betweenness and flow betweenness, on the other hand, are not associated with lower firm valuations. We argue that these differences derive from the different properties of these measures: while degree and eigenvector centrality measures the influence and the power of the connections, betweenness and flow betweenness are proxies for the volume of information that passes between the nodes. This result is robust with respect to the use of both stock market and operating performance measures, as well as several controlling variables.

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Notes

  1. As discussed by Monks and Minnow (2008), the Sarbanes-Oxley Act resulted in a reduction of multiple interlock relationships among boards in the US.

  2. According to this view, interlockings represent social ties among members of the upper class.

  3. Graph centrality measures are extensively used in several fields, such as physics (Albert and Barabási 2002), biology (Wuchty and Stadler, 2003; Barabási and Oltvai, 2004; Estrada, 2010), economics and finance (see D’Errico et al., 2008; Milakovic et al., 2010; Piccardi et al., 2010; Grassi, 2010). For an overview of centrality in social networks, we refer to Wasserman and Faust (1994).

  4. As reported by Dooley (1969), in 1914 US Supreme Court justice Louis Brandeis wrote that:

    The practice of interlocking directorates is the root of many evils. It offends laws human and divine. [] Applied to corporations which deal with each other, it tends to disloyalty and to violation of the fundamental law that no man can serve two masters. [] it removes incentive and destroys soundness of judgement. It is undemocratic, for it rejects the platform: A fair field and no favors, substituting the pull of privilege for the push of manhood.

  5. Unlike our paper, Andres and Lehmann (2011) examine whether or not the director is connected. Therefore, the director, not the firm, is their unit of analysis.

  6. Fich and Shivdasani (2007) estimate that the financial penalty associated with a lost directorship amounts to $1 million per year for outside directors of firms involved in financial scandals.

  7. For other graph definitions, we refer to Harary (1969).

  8. We recall that the Euclidean norm is defined as \(\Vert \mathbf{x}\Vert_{2}=\sqrt{\sum_{i=1}^{n}x_{i}^{2}}\).

  9. Associazione tra le Società Italiane per Azioni.

  10. Acque Potabili, Centrale del Latte di Torino & C., Mediterranea delle Acque compose this triangle. Acque Potabili and Mediterranea delle Acque are utilities whose largest shareholder is, directly or indirectly, the city of Turin. Centrale del Latte di Torino & C. is a family controlled business (Artom family), which shares a director with the other two companies. Thus, this triangle is not a business group.

  11. A star graph is a graph in which only one node has more than one edge, and it is connected with all other nodes. This corresponds to the maximum possible centralization for the node, which is positioned at the center of the star. The (normalized) eigenvector centrality is the vector \(\mathbf{x}= [\frac{1}{\sqrt{2}}, \frac{1}{\sqrt{2(n-1)}},\ldots, \frac{1}{\sqrt{2(n-1)}}] ^{T}\).

  12. Since the market value of debt is not usually available, we use the book value of financial debt as a proxy for its market value.

  13. We also check whether the firm belongs to a business group. We find that 32.27 % of the listed firms in Italy share the same controlling shareholder with another listed firm (i.e., 91 out of 282). However, in unreported regressions, we do not observe any effect due to being part of a business groups.

  14. The regression in Column (1) does not include the clustering coefficient because it is possible to compute this coefficient only for firms in the giant component. If we included the clustering coefficient in Column (1), results would be identical to Column (2).

  15. The limited number of observations does not allow to run the regression analysis at industry level.

  16. To avoid extreme outliers, we winsorize the variable Sales Growth at the 2.5 % and 97.5 % points of the distribution.

  17. We rerun the regression models of Table 5 including the voting rights of the largest shareholder and the group dummy. We obtain results that are remarkably similar to the ones presented in the table.

  18. Starting with the corporate governance reform of 2003, Italian firms are allowed to choose from three types of board structures: the traditional board (one-tier with a board of statutory auditors); a one-tier model similar to the US board; a two-tier board like in Germany. The great majority of Italian listed firms still adopts the traditional board.

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Acknowledgements

The authors thank three anonymous referees, the Editor, Massimo Belcredi, and Giovanni Zambruno for their helpful suggestions and comments, which improved the quality of the paper. We also thank Assonime, which kindly provided us with corporate board data.

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Correspondence to Rosanna Grassi.

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Croci, E., Grassi, R. The economic effect of interlocking directorates in Italy: new evidence using centrality measures. Comput Math Organ Theory 20, 89–112 (2014). https://doi.org/10.1007/s10588-013-9154-1

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