Social Networks, CEO Background, and Corporate Financing: A Dyadic Analysis of Similarity of Borrowing by Large U.S. Firms, 1973-1993*

Organizational researchers have increasingly demonstrated that social relations among firms are associated with various organizational strategies. In this paper we examine the extent to which economic, organizational, and social network factors affect the use of debt financing by large American corporations. Examining the more than 43,000 dyadic relations among 165 large U.S. firms at five time points over a 20-year period, we find that pairs of firms that have director interlocks, similar numbers of financial institution representatives on their boards, and CEOs with career backgrounds in finance and accounting were more likely than firms without these qualities to engage in similar levels of borrowing between 1973 and 1983. In the 1988-1993 period, however, financial factors such as similar levels of retained earnings and similar recent performance took on a more important role in predicting similarity of borrowing, while the social network factors became less significant. Further analysis suggests that pressures brought on by the merger movement of the 1980s and the increased external monitoring of firms by the financial community in the early 1990s may have led to the increased relative importance of financial versus social factors. We conclude that corporate financing is socially embedded, but this embeddedness is historically contingent. In the past two decades, organizational theorists have increasingly turned their attention to the social embeddedness of firm behavior. The acknowledgement that firm strategies are affected by both their location in interorganizational networks and by the meaning systems that frame their managers’ decision making options has taken a prominent place within the organizational literature. This approach has been applied to a broad range of topics, including, to name just a few, mergers and acquisitions (Haunschild, 1993; Stearns and Allan, 1996; Palmer and Barber, 2001), adoption of the multidivisional form (Fligstein, 1985; Palmer, Jennings, and Zhou, 1993), takeover defense strategies (Davis, 1991), board-CEO relations (Wade, O’Reilly, and Chandratat, 1990; Zajac and Westphal, 1995; Westphal and Zajac, 1997; Geletkanycz and Hambrick, 1997), and even firms’ decisions to move from the NASDAQ stock market to the New York Stock Exchange (Rao, Davis, and Ward, 2001). Although organizational researchers have become increasingly bold in terms of the firm strategies they have studied, there are some issues that are assumed to remain the purview of economists, and have therefore attracted little attention. One of these issues involves the ways in which firms manage their capital; that is, the basis on which firms determine their financing strategies. In this paper, we apply the tools of organizational analysis to address this most “economic” of topics. We examine the extent to which intra and interfirm social relations affect firms’ use of external debt financing. Using data on large American corporations over a 20-year period, we develop a series of hypotheses about the factors that account for the similarity of financing strategies among firms. A small but growing literature on financing has recently emerged in organizational research. Most of this work involves the analysis of credit and the effectiveness of credit-rating systems (Carruthers and Cohen, 2001; Guseva and Rona-Tas, 2001) or the acquisition of venture capital (Podolny, 2001; Sorenson and Stuart, 2001). Uzzi (1999) has examined the determinants of whether “mid-market” firms gain access to capital, as well as the interest rate on the funds they borrow. He has shown that the social relations between firms and their banks have significant effects on both of these variables. While Uzzi’s concern is with whether middlesized firms are able to acquire capital and if so, the price that they pay for it, our study examines