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Social Embeddedness of Corporate Elites and Uncertainty in Financial Markets


Rost, Katja (2014). Social Embeddedness of Corporate Elites and Uncertainty in Financial Markets. Corporate Board: Role, duties and composition:18-38.

Abstract

In the last decade regulatory pressure includes appeals that corporate elites should reduce their multiple directorships to a minimum. The functionality of this governance mechanism is suggested by agency theory. The embeddedness view counter-argues that social relationships matter for the effectiveness of corporate governance. In particular for ill-structured tasks like stock price valuation social networks solve fundamental coordination problems in markets by reducing the risks of market exchange, by establishing a common base of recognition and by getting actions and blocking actions. For the Swiss banking sector this article shows that the social embeddedness of corporate elites reduces the volatility of stock prices. With respect to regulatory pressure against multiple directorships it recommends a more balanced view. While for investors and stakeholders certain amounts of stock price volatility are surly desirable, exorbitant fluctuations of stock prices – like in financial crises – are definitely not. Social embeddedness should therefore be considered by economic and financial theory: it does prevent the misspecification of regulatory proposals and incentive regimes.

In the last decade regulatory pressure includes appeals that corporate elites should reduce their multiple directorships to a minimum. The functionality of this governance mechanism is suggested by agency theory. The embeddedness view counter-argues that social relationships matter for the effectiveness of corporate governance. In particular for ill-structured tasks like stock price valuation social networks solve fundamental coordination problems in markets by reducing the risks of market exchange, by establishing a common base of recognition and by getting actions and blocking actions. For the Swiss banking sector this article shows that the social embeddedness of corporate elites reduces the volatility of stock prices. With respect to regulatory pressure against multiple directorships it recommends a more balanced view. While for investors and stakeholders certain amounts of stock price volatility are surly desirable, exorbitant fluctuations of stock prices – like in financial crises – are definitely not. Social embeddedness should therefore be considered by economic and financial theory: it does prevent the misspecification of regulatory proposals and incentive regimes.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:06 Faculty of Arts > Institute of Sociology
Dewey Decimal Classification:300 Social sciences, sociology & anthropology
Language:English
Date:2014
Deposited On:25 Nov 2014 16:27
Last Modified:05 Apr 2016 18:32
Publisher:Virtus Interpress
ISSN:1810-8601
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.virtusinterpress.org/IMG/pdf/CB__Volume_10_Issue_1_2014_contents.pdf
Related URLs:http://www.virtusinterpress.org/-Corporate-Board-role-duties-and-.html (Publisher)
Permanent URL: https://doi.org/10.5167/uzh-101143

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