Managers’ external social ties at work: Blessing or curse for the firm?

• We study how managers’ external social ties impact the quality of their hiring decisions.
• We use data on player hiring decisions in the NBA throughout 1977–2011.
• We show that players who were hired through social ties reduce team performance.
• The negative performance effect stems from acquisitions under weak monitoring from team owners.

Existing evidence shows that decision makers’ social ties to internal co-workers can lead to reduced firm performance. In this article, we show that decision makers’ social ties to external transaction partners can also hurt firm performance. Specifically, we use 34 years of data from the National Basketball Association and study the relationship between a team's winning percentage and its use of players that the manager acquired through social ties to former employers in the industry. We find that teams with “tie-hired-players” underperform teams without tie-hired-players by 5 percent. This effect is large enough to change the composition of teams that qualify for the playoffs. Importantly, we show that adverse selection of managers and teams into the use of tie-hiring procedures cannot fully explain this finding. Additional evidence suggests instead that managers deliberately trade-off private, tie-related benefits against team performance.