Board Interlocks And Over-investment Contagion

In the modern financial management, investment is seen as one of the three most important decisions of a corporation. Investment is a process of making use of all the resources of a company and is the basis of value creation. As we know, the resource of a corporation is scarce, so the efficiency of investment not only represents the rationality and effectiveness of a company’s resource configuration, but also concerns its business performance and capital appreciation. Nevertheless, in real life, some companies will always be there that have low efficiency of resource configuration, that is to say over-investment or under-investment. As a way of wasting of resources, over-investment has gained attention in practical circle and has attracted extensive research in academia as well. Scholars have made comprehensive studies on the influencing factors of over-investment, on the basis of which, this paper combines the sociological theory and economic theory, bringing in the theory of social network and social embeddedness, and we find a new factor that affect the efficiency of investment-- interlocking directorates. Interlocking directorate has been an universal phenomenon in corporations, and they interact when embedded in corporation network and have appreciable impact on corporate investment decisions. How interlocking directorates impact corporate governance has got concerns nowadays and relevant researches have covered many aspects. But the influence of interlocking directorates on over-investment has always been ignored. This paper makes an empirical analysis for the impact of interlocking directorates on over-investment from static mechanism and dynamic mechanism, using data of the A stock market of China listed company. We get the wanted results at last.In static mechanism, we studied how the existence, independence and position of interlocking directorates affect over-investment. The results indicate that:(1) when interlocking directorates exist in a company, it will have a higher possibility to overinvest compared with which that doesn’t has interlocking directorates. What’s more, the number of interlocking directorates will increase this possibility. Thus, the relationship between interlocking directorates and over-investment has been improved. (2) The independency of interlocking directorates has vital effect on over-investment, which means when interlocking directorates in companies are also independent directors, it will be more likely to result in over-investment. Similarly, the amount of independent directors has same effect. (3) If interlocking directorates take up high positions in a company, say the board chairman or general manager, it will increase the chances to overinvest.The dynamic mechanism makes a research on the contagion of interlocking directorates. It aims at discussing when interlocking directorates lead to over-investment in a company, after the infective period, whether the behavior will transmit to another company which has the same interlocking directorates. The results are as follows:(1) in infective period, if a company have contagious interlocking directorates, it will be more likely to overinvest after the infective period. (2) When the contagious interlocking directorates are non independent directors or hold high positions at the same time, the possibility of over-investment will be higher. The results not only find proofs of the hypothesis, but also testify the rationality of dynamic mechanism.The empirical analysis of this paper finds out desired results and has important meaning. On one hand, it supports the social network and social embeddedness theory and has vital theoretical significance. On another hand, it prides a new direction for administrators and regulators to manage a corporation.