Abstract: Did Well-Connected Directors Add Value? Network Centrality and Investor Valuation in Brazil and Mexico, 1905-1909

Aldo Musacchio and Ian Read


What is the role of networks of interlocking boards of directors under different institutional settings? This paper explores that question in Brazil and Mexico in 1909. The first hypothesis tested is that in countries with institutions that protected investors and with courts that enforced contracts, corporations did not need to have close relationships with bankers in the form of interlocking directorates. In countries where institutions did not help to facilitate the disclosure of corporate information and where contracts were not necessarily enforced by the courts, interlocking boards of directors worked as a commitment mechanism between banks and corporate borrowers. The second hypothesis tested is that in countries where the enforcement of contracts is done by courts and where corporate information is publicly disclosed, we would not find significant informational advantages for network positioning, especially by banks,.whereas in countries with poor enforcement of contracts and with poor disclosure rules, we would expect to find informational advantages for central actors in the network of corporate interlocks, in particular banks. Thus, the paper shows that in Brazil, a country with institutions that protected investors and courts that enforced contracts, relationships with bankers were not as important as in Mexico, where contract enforcement and disclosure rules made informal arrangements more important to generate credible commitments and where network position did give some banks advantages reflected in some performance indicators.