Director connectedness and firm value in S&P 500 Index reconstitutions

Exploring director connectedness around S&P 500 Index revisions, this paper studies whether board connections contribute value to the firm. Even compared to firms of similar size, S&P 500 Index boards are more central in the network of directors. After inclusion to the Index, boards become more central in the director network, and newly added firms are more likely to get new directors from other S&P 500 Index boards. Those newly added firms with lower connectedness pre-inclusion accrue larger abnormal announcement returns stemming from the benefit of increasing director centrality after inclusion. In contrast, firms with more centralized boards suffer larger losses upon removal from the Index. Using the local supply of directors as an instrument, we demonstrate that well-connected directors as well as the percent of S&P 500 Index directors contribute to firm value.