The Effect of Board Structure on Firm Performance - New Evidence from Product Market Conditions

51 Pages Posted: 16 May 2018 Last revised: 31 Jul 2018

Xiaoyuan Hu

Cornerstone Research

Danmo Lin

University of Warwick - Finance Group

Onur Tosun

University of Warwick - Finance Group

Date Written: March 1, 2018

Abstract

We study the effect of corporate board structure on firm performance under different product market conditions. Using customer-supplier links to identify exogenous downstream demand shocks, we find that board independence has a more significant effect on firm performance when the firm-specific product demand drops, compared to other demand conditions. The results are more pronounced when a firm is smaller, experiences higher growth, or has higher stock price volatility. We further show that our documented effect of board independence only prevails if the firm faces medium level of product market competition, or if the negative shock is at a medium level. We provide suggestive evidence supporting the view that it is the board’s monitoring function that drives the effectiveness of board independence in bad times, rather than its advisory function.

Keywords: Board independence, firm performance, customer-supplier link, downstream demand shocks, product market competition

JEL Classification: G34, L11, L25

Suggested Citation

Hu, Xiaoyuan and Lin, Danmo and Tosun, Onur, The Effect of Board Structure on Firm Performance - New Evidence from Product Market Conditions (March 1, 2018). WBS Finance Group Research Paper. Available at SSRN: https://ssrn.com/abstract=3171998 or http://dx.doi.org/10.2139/ssrn.3171998

Xiaoyuan Hu

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

Danmo Lin

University of Warwick - Finance Group ( email )

Warwick Business School
Scarman Road
Coventry, CV4 7AL
Great Britain

Onur Kemal Tosun (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry CV4 7AL
United Kingdom
+44(0)2476524541 (Phone)

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