French Corporate Network and Financial Performance

François-Xavier Dudouet, Ju Qiu, Antoine Vion


For almost 50 years, agency theories have taught us that the financial performance of firms is linked to the alignment of management with the interest of shareholders (Jensen & Meckling 1979, Fama & Jensen 1983, Zara & Pearce 1989). According to this approach, managers are, by nature, suspected of diverting the firm's resources on their behalf (Hallock 1997) and thus reducing the share that should go to shareholders. This implies that the manager should focus on the firm's financial performance to the exclusion of all other considerations, such as serving on other boards of directors. By extension, it was considered that where directors' networks were the densest, there were strong social ties between executives that protected them from shareholders leading to inferior financial performance (Kramarz & Thesmar 2008). The purpose of our communication is to appraise this correlation from a panel composed of the largest French companies between 2001 and 2010. In line with previous studies (Hillman & Daniel 2003, Phan et al. 2003, Peng et al. 2015, Zona et al. 2018), we compared the financial performance of a set of listed companies. We retained the forty largest capitalizations on the Paris stock exchange over ten years with their respective positions in the networks of directors they form among themselves. According to the theory, the more a company occupies a peripheral position in the network, the higher its financial performance should be, and vice versa. Regression tests show that there is no correlation between geodetic measures of firms and financial performance, except for financial firms. In this case, the more central the firm's position, the worse its performance. However, this correlation disappears for the period 2001-2006, being significant only during the financial crisis period. Finally, share price performance is positively correlated with links with financial firms. Our results therefore indicate the importance of social ties, especially in times of crisis, contrarily to agency theories’ usual assumptions.

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