The Effect of Board Overlap on Firm Behavior

Abstract

The staggered introduction of Corporate Opportunity Waivers (COWs) in nine US states since 2000 reduced legal risk to directors serving on multiple boards and increased intra-industry board overlap in firms characterized by intensive R&D activity. More board overlap results in a higher return on assets, higher profit margins, and higher sales revenues in spite of reduced factor inputs. The higher profitability is observed equally for new board overlap with and without own-board alteration, which rules out improved board quality as an explanation. Instead, higher profitability appears to originate in reduced firm rivalry measured by less innovation activity and increased product market segmentation rather than the synergetic exploitation of more and better corporate opportunities.