The Impact of Interlocking Directorates on Firm Value: Empirical Evidence from KOSDAQ companies in Korea

Abstract

Purpose: This study aims to analyze the impact of interlocking directorates on firm value, with a focus on KOSDAQlisted companies. Specifically, it seeks to determine how interlocking directorates of inside and outside directors differentially affect firm value. Design/methodology/approach: Interlocking directorates are defined as situations where a single director serves on the boards of two or more companies. A regression analysis was conducted using a dataset of 6,436 firm-year observations from 2018 to 2022. To enhance the reliability of the results, the study distinguishes between inside and outside directors and enhances the analysis by employing a panel approach. Ultimately, a balanced panel was constructed to empirically analyze the impact of interlocking directorates on firm value. Findings: The findings indicate that an increase in interlocking directorates of inside directors is significantly associated with a decrease in firm value, while an increase in interlocking directorates of outside directors leads to a significant increase in firm value. These results suggest that the impact of interlocking directorates may vary depending on the characteristics of the directors. Consistent results were observed through a balanced panel analysis. However, in the case of interlocks with KOSPI-listed firms, only inside directors’ interlocks were found to have a significant effect on firm value. Research limitations/implications: This study focuses solely on interlocking directorates and does not consider other types of personal networks, such as regional or educational ties. Additionally, it faced limitations in securing a sufficient sample size for interlocking directorates with KOSPI-listed firms for analysis. Originality/value: This study provides critical empirical evidence on the effects of interlocking directorates in KOSDAQ-listed firms. It adds to existing research on interlocking directorates in the KOSPI market by demonstrating that similar effects are observed in the KOSDAQ market, offering valuable insights for the decision-making processes of KOSDAQ companies and their stakeholders.