How Does Board Structure Affect Customer Concentration?
47 Pages Posted: 13 Sep 2018 Last revised: 14 Oct 2018
Date Written: October 1, 2018
We study how board structure affects a firm's customer base. Using the Sarbanes-Oxley Act of 2002 (SOX) and related governance reforms as exogenous shocks that increase board independence, we find that SOX-affected firms diversify their customer base because of the reforms. In the average SOX-affected firm, the percentage of sales made to all the major customers decreased by 2.19 percentage points when compared to that of the control peers. Lower customer concentration is associated with higher Tobin's Q. The most likely channel through which SOX brings these changes is by removing directors or executives linked to major customers.
Keywords: Board of directors, customer concentration, corporate governance, customer base
JEL Classification: G30, G34, G38
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