How Information Travels Through Boardroom Networks
In stocks whose directors are highly connected, sophisticated traders operate with a sharper information edge.
Directors sit on information their firms would rather keep private, and they also sit at the center of wide professional networks. This research asks whether those networks leak.
The study finds that sophisticated investors, meaning short sellers, option traders, and financial institutions, are measurably better informed when trading stocks of companies with well-connected boards. For firms with large director networks, the annualized return spread between the highest and lowest quintiles of informed trading runs roughly 4 to 7 percentage points wider than at comparable firms with less connected directors.
The edge is genuinely informational. At connected firms, these investors better anticipate earnings surprises and the tone of upcoming firm-specific news, and changes in a board's connectedness move together with measures of adverse selection in the stock.
Connected boards bring firms advice and access. This evidence highlights the flip side: the more people a boardroom touches, the more paths sensitive information has to travel.
The Takeaway
Board connections act as a conduit. Sophisticated traders extract larger, better informed profits in stocks of firms with highly networked directors.