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

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