Directors Networks and Innovation Herding
53 Pages Posted: 1 Aug 2022
Date Written: July 10, 2022
This paper examines the role of overlapping director networks on firm innovation, competition, and performance. First, we document that, despite potential legal challenges, overlapping directors are surprisingly most prevalent among direct competitor firm-pairs. Using panel data regressions with rigid controls and plausibly exogenous shocks, we find that competing firms in markets with dense director overlaps engage in innovation herding, experience losses in product differentiation, and ultimately perform poorly. Novel network propagation tests of individual technologies show that intellectual property leakage plays a role as firms with overlapping directors experience faster propagation of technologies to their competitors. Our results are most consistent with an agency conflict that is new to the literature, as directors can realize better career outcomes by leaking sensitive information across boards, even though a consequence can be value destruction for shareholders.
Keywords: Director Networks, Product-market competition, Innovation
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