How Law Changes Networks: A Social Network Analysis of Board Interlocks

This paper empirically examines the market's reaction to increased corporate governance provisions which were applied to pyramid-structured corporations under the Promotion of Competition and Reduction of Concentration Law. Specifically, the paper examines the influence of legal provisions dealing with the composition of boards of directors on the intensity of board connectivity in Israel. For the purpose of said examination, two databases were specially constructed, which include detailed information regarding boards of the 50 largest publicly-traded firms in the Israeli market. One database reflects the situation six months prior to the entry of the Reduction of Concentration Law into force, and the second database reflects the situation six months after the legislation has entered into force. This data has been processed and analyzed, using methodologies from the Social Network Analysis field, in order to examine the changes that occurred in various connectivity indices as a result of the legislation. The findings of the empirical analysis show that following the entry into force of these legal provisions, the average number of directors per board has declined, and so has the average number of corporates on which sits a director. In addition, there has been a decline in the level of connectivity of the board interlocks within the large publicly-traded corporations in Israel. The intensity of the decline was lower than that which was expected under complete adherence to the minimal standard required in primary and secondary legislation. The connections between directors themselves are complex and dense, but there has also been a decline in the level of connectivity between directors following the aforementioned regulatory changes. Additionally, when dividing the market to groups based on the intensity of connections between firms, one can see an increase in the number of different groups within the same sample of firms, and a decrease in the number of connections between groups.