Firm social network, information opacity and firm value

Abstract

Purpose This study aims to investigate the impact of a firm's social network on the quality of the firm's information environment and whether the information benefit obtained through the social network (i.e., improved information quality)- is ultimately reflected in firm value. Design/methodology/approach The study employs multiple linear regression including Weighted Least Squares (WLS) regression, economic significance test, Heckman two-step selection model, propensity score-matched (PSM), entropy balancing and two-stage least squares (2SLS) instrumental variable method. Findings The study provides evidence that a firm's social network size positively impacts the quality of its information environment and that the firm complexity moderates the relationship. Additionally, social network size positively influences firm value, mediated by improved information quality. Research limitations/implications The study responds to the call by Engelberg et al. (2013) to identify the mechanism by which the social connections of the employees in a firm create value for the firm. This study will be of interest to managers, directors, policymakers and other stakeholders. Practical implications Our study highlights that stronger firm social networks are linked to reduced information opacity, offering practical insights for managers, investors, regulators, and policymakers. Managers and boards can enhance information quality by promoting executive networking through targeted initiatives. Investors may use a firm's connectedness as a signal of information transparency. Regulators and standard setters may find these findings relevant as they emphasize non-financial information. Policymakers can support this effort by encouraging networking skill development, ultimately improving firms' information environments. Social implications Our study contributes to this body of work by highlighting the social implications of firm-level connections. Specifically, we provide evidence that employee relationships, formed through shared educational backgrounds, professional experiences, and participation in social clubs, serve as effective channels for information exchange. These connections facilitate the flow of knowledge, ideas and insights within organizations, enhancing communication and decision-making processes. Originality/value The study fills the gap in the literature by investigating whether the presence of a firm's professional, educational and other social connections with employees of outside companies affects the quality of the firm's information environment and whether the information benefit obtained through the social network (i.e., improved information quality) is ultimately reflected in firm value.