Companies may want to think twice about hiring employees based on their business contacts.

Researchers reached that conclusion after analyzing the signings and performance of every team in the National Basketball Association (NBA) from 1977 to 2011. Teams who signed players through their managers’ contacts at his old clubs produced a lower winning percentage than those that didn’t.

“We found teams with ‘tie-hired-players’—that is those where the manager signed the player through former colleagues on the coaching staff or among the owners at one of their old clubs—win 45.2 percent of their regular season games, while teams without such players win 50.2 percent of their games. And that is after controlling for a team’s budget and quality differences in teams and managers,” says Leif Brandes of Warwick Business School.

“Anecdotally it seems firms often seek well-connected employees, but our industry-wide analysis shows the hidden costs of such hiring practices.

“Pre-existing strong social ties to colleagues at a former business in the same industry are potentially very influential as they create opportunities for various deals and transactions. But our study found evidence that such external business contacts interfere with a company’s ability to select the best transaction partner.”

In spite of this negative performance effect, Brandes and colleagues found that the 146 active managers between 1977 and 2011 were on average 32 percent more likely to acquire players from teams they had been at before than from unrelated teams, resulting in a total of 190 tie-hired-players.

“We also found the negative performance effect is entirely driven by managers under team owners who do not have strong incentives to scrutinize their manager’s decisions,” adds Brandes.

“These are owners who have brought in the manager, so will give them more leeway as firing them means they are admitting to a mistake.

“If the owner arrives after the manager, the manager is scrutinized more as he is easier to fire, because they are correcting someone else’s hiring mistake, and not their own.”

Information on manager turnover in the NBA supports the idea that new owners engage in stronger monitoring as within one year of an ownership change 48 percent of pre-existing managers are replaced. This would suggest under new ownership, a manager would come under far more scrutiny.

“While the setting of this analysis is unusual, the results of our study have fairly broad implications. Several studies in the management and economics literature reveal that employees’ external social network influences their decision-making on behalf of the firm, for example, in connection with hiring, financing, or investing.

“The fact that these business ties persist beyond shared working experiences makes them potentially influential in decisions made on behalf of the company.

“Basketball provides a data-rich environment to explore what effect these ties outside the company have on performance, and we find the negative effect of a manager’s business contacts is large.

“It is something managers and companies need to consider when making decisions in both hiring and in other transactions.”

Marc Brechot and Egon Franck from the University of Zurich collaborated on the study, which appears in the Journal of Economic Behavior and Organization.

This text is published here under a Creative Commons License.
Author: Ashley Potter-University of Warwick
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