Does it pay to have friends? Social ties and executive appointments in banking

We exploit a unique sample to analyze how homophily (affinity for similar others) and social ties affect career outcomes in banking. We test if these factors increase the probability that the appointee to an executive board is an outsider without previous employment at the bank compared to being an insider. Homophily based on age and gender increase the chances of the outsider appointments. Similar educational backgrounds, in contrast, reduce the chance that the appointee is an outsider. Greater social ties also increase the probability of an outside appointment. Results from a duration model show that larger age differences shorten tenure significantly, whereas gender similarities barely affect tenure. Differences in educational backgrounds affect tenure differently across the banking sectors. Maintaining more contacts to the executive board reduces tenure. We also find weak evidence that social ties are associated with reduced profitability, consistent with cronyism in banking.

Highlights

► We analyze how homophily and social ties affect career outcomes in banking. ► Homophily based on age and gender increase the chances of the outsider appointments. ► Similar educational backgrounds reduce the chance that the appointee is an outsider. ► Greater social ties increase the probability of an outside appointment. ► We also find weak evidence of cronyism in banking.