Directors’ networks and firm valuation in a concentrated ownership structure economy

ABSTRACT We explore the implications of directors' networks for company valuation in a concentrated;ownership environment and in pyramidal control structures. Using common;centrality indexes on a sample of 727 directors serving in 105 Israeli listed firms, we;show that the effect is very dependent on the type of director. Directors who are;neither external nor ultimate owners, and therefore presumably experts, tend to promote;firm valuation and mitigate the negative impact of a pyramidal control structure.;Conversely, central external directors have a tendency to harm firm performance and;even magnify the negative effect of the vote-ownership wedge, due to the pyramidal;ownership structure. Our findings support the claim that shareholders with controlling;interests are, in fact, shadow directors, who utilize their excessive influence on;external directors to carry out tunneling (ie, the diversion of value from the company;for their own personal gain).