CEO social capital and asset sell-offs

Abstract

Purpose

Recent studies explore how chief executive officer (CEO) social capital affects corporate decision-making. Well-connected CEOs can have greater access to information, which can lead to better corporate decisions or permit them to amass power from hierarchy status and make self-serving decisions. This study examines whether investors perceive CEO social capital as a signal of good decision-making (assuming information asymmetry) surrounding asset sell-off events.

Design/methodology/approach

The authors use multivariate regression analysis to examine the effect of CEO social capital on the cumulative abnormal returns (CARs) of the asset buyers and sellers. CARs are estimated using a market model in the period proximate to asset sell-off announcements.

Findings

The authors find that CEO social capital is positively associated with announcement returns of the asset sellers. Moreover, the positive effect of CEO social capital on announcement returns is more pronounced for sellers facing greater information asymmetry. An analysis of post-announcement stock performance reveals that the seller CEO social capital is associated with additional value generated for the shareholders of the seller after a month from the announcement date, especially if the transaction price is disclosed. Overall, findings are consistent with the argument that CEO social capital provides value in high information asymmetry environment.

Originality/value

To the authors' knowledge this is the first study to examine the effect of CEO social capital on the shareholders' wealth created by divestitures.

Citation

Danso, C., Kaprielyan, M. and Hossain, M.M. (2021), "CEO social capital and asset sell-offs", Managerial Finance, Vol. 47 No. 11, pp. 1571-1587. https://doi.org/10.1108/MF-02-2020-0085