Interlocking directorates, competition, and innovation

Abstract

Holding concurrent seats on boards of rival firms, ‘horizontal directors’ dampen competition and improve firm performance. In the cross-section of public US firms, losing an interlock with a competitor decreases returns by 3 percentage points. I propose a mechanism of market segmentation where horizontal directors steer firms away from fierce direct competition. Using data on patenting, I show that horizontal interlocks help firms maintain distance in the competitive space and reduce redundancy, increasing innovation quantity by 17% and quality by 30%.