CEO Social Connections and Bank Systemic Risk, the “Dark Side” of Social Networks

We find that banks governed by more socially connected CEOs have a higher degree of systemic risk than those governed by less socially connected CEOs. We employ a difference-in-differences design and the instrumental variable method to address endogeneity concerns, using CEO death as an exogenous shock to the social network. We further document two mechanisms through which CEOs’ social networks affect bank systemic risk. First, we find that banks governed by socially connected CEOs are more active in interbank transactions. Second, banks with connected CEOs share a higher asset similarity than those without connected CEOs. Our findings suggest that CEOs’ social connections influence banks’ interconnectedness and can contribute to the systemic risk in the banking sector