Interlocking Directorate, Firm Value, and Product Market Competition

I document a 500% increase in directorate interlocks with product market competitors among U.S. non-financial public firms over the past decade. Utilizing announcements from the U.S. Department of Justice regarding the enforcement of Section 8 of the Clayton Act as an exogenous shock to litigation risk associated with interlocks, I examine the net value of directorate interlocks with product market competitors to a firm. I validate the shock through both a difference-in-differences analysis and a regression discontinuity design using the threshold on equity value, demonstrating that Section 8 enforcement caused firms to lose directorate interlocks in the subsequent months. Then, I show that treated firms experienced a 7.1% decline in firm value within eight weeks following the announcement shock when compared to control firms while controlling for Fama-French five factors. Regression discontinuity analysis confirms the causal impact on stock prices. Moreover, the recent escalation in interlocking directorates was primarily attributed to the subset of firms exhibiting the highest product similarity with their competitors. Both product similarity with competitors and the number of competitors were negatively correlated with stock returns following the shock. These results support the theory that companies collaborate with competitors in the product market via shared board members. The quality of overlapping directors is not correlated with post-event stock returns, rejecting the notion that firms lose high-quality directors as a consequence of the shock.