Download This PaperHow Does Board Structure Affect Customer Concentration?
43 Pages Posted: 13 Sep 2018 Last revised: 4 Aug 2020
Date Written: August 4, 2020
Abstract
This paper studies the interactions between corporate boards and major customers. Using the Sarbanes-Oxley Act of 2002 (SOX) and consequent governance reforms as a quasi-natural experiment, we find that SOX-affected firms diversify their customer bases by removing directors with business links to them. A one standard deviation decrease in the proportion of linked directors is associated with an 11.80% proportional decrease in the percentage of sales to all the major customers. SOX-affected firms enjoy lower overall and idiosyncratic risk post-SOX, possibly due to reduced hold-up risk. Our work provides novel evidence on how corporate boards affect firms' risk-taking behavior.
Keywords: Board of directors, customer concentration, corporate governance, customer base
JEL Classification: G30, G34, G38
Suggested Citation: Suggested Citation