directors deteriorate the quality of earnings).
We hypothesize that the excess compensation levels of interlocked firms and connected firms documented by the earlier cited papers may be indicative of weak governance and entrenched management.
For a sample of 3,566 firm-years over the 2001-2003 time period, we find that poorly performing firms are more likely to have interlocked directors on their boards.
In further analysis, we find that the market reacts negatively to the announcement of director appointments that create interlocked boards.
The next section surveys related literature on interlocked and connected boards and provides the motivation for our paper.
Earlier work by organizational theorists broadly proposed two opposing viewpoints as to why interlocked boards may arise.
This measure, as with the other two measures, accounts for the number of interlocked boards at the firm level and eliminates double counting by only considering unique instances of interlocks.
This measure also accounts for the number of interlocked boards at the firm level.
The age of a firm (AGE OF FIRM) also affects the number of firm interlocks because older firms are more established, and hence are more likely to have interlocked boards.
Specifically, outside directors represents a conduit for the firm to be interlocked with other firms, which increases the flow of information.
In addition, we created a variable reflecting the interaction of size with the number of acquisitions by the interlocked firms and tried other size measures: assets, number of employees, and total equity.
We also created a variable reflecting the interaction of centrality with the number of acquisitions by the interlocked firms.