Network Analysis in Corporate Finance

Social networks are formed by relationships between social units (e.g., individuals or organizations). They affect social outcomes, which are shaped not only by the characteristics of individual social units but also by the ties that link them to other units. For example, the impact of directors on their firms may depend on their connections with directors of other firms. A social network consists of nodes or vertices (i.e., the social units) connected via ties or links based on, e.g., membership of the same organizations and a shared educational background. There might also be multiple ties between two social units, i.e., so-called multiplex relationships, which amplify the strength of the relationship. E.g., directors who not only serve on the same board, but also studied at the same university and are members of the same social club, are likely to have strong ties. Social networks can be of the one-mode or two-mode type. The former type consists of a single set of social units, such as directors with shared board membership. The latter type involves two sets of actors (e.g., directors and firms). For one-mode networks, centrality measures are used to quantify the prominence of social units. Q-analysis is used to study two-mode networks. In corporate finance, network theory has many potential applications, such as those that relate to informational diffusion across, e.g., directors and corporations; access to resources (e.g., capital); insider trading; monitoring quality; asymmetric information (e.g., bank lending relationships); financial contagion and systemic risk; and strategic alliances.