Findings and Discussion

Director overlaps are most common where leakage concerns are most acute. The incidence of overlapping directors rises sharply as firms become closer product-market competitors, and these direct-competitor overlaps have become more common over time. This growth in board overlap is striking because board overlaps among competing firms may raise legal concerns under Section 8 of the Clayton Act, even though enforcement has historically been limited.

Dense competitor networks are associated with weaker differentiation. Firms surrounded by more densely connected direct competitors become more similar to their TNIC-4 rivals and face higher product-market fluidity, a measure of competitive pressure from shifting product markets. These patterns are consistent with innovation herding: technologies and product ideas circulate through the network, and firms move toward similar product-market positions.

The performance evidence is consistent with the product-convergence result. Firms in denser competitor director networks have lower future ROA and lower market-to-book ratios, which is the expected consequence given the loss of product differentiation. They also spend more on R&D without generating stronger proprietary innovation. This pattern suggests R&D in dense networks may partly reflect technology catching up: firms invest to absorb and commercialize ideas already circulating among rivals, rather than to create more valuable and distinctive intellectual property.

The ISS rule helps address whether these patterns reflect endogenous board formation. The 2004 proxy-advisor rule reduced pressure for highly connected multiboard directors, creating a shift in competitor-network density that was plausibly unrelated to any individual firm’s innovation prospects. Using this shock, the authors find changes in network density predict the same deterioration in differentiation, performance, and innovation value. The evidence therefore supports a causal interpretation rather than a simple story in which weaker firms choose different board networks.

The COW evidence speaks more directly to the leakage mechanism. These state laws reduced directors’ legal exposure when corporate opportunities moved across firms. If information leakage drives the results, dense competitor networks should have stronger effects when more peer firms are exposed to these waivers. The authors’ find evidence consistent with this prediction. The COW findings therefore link the performance and innovation patterns to leakage incentives, rather than only to board connectivity itself.

The technology-level tests show what is actually moving through the network. Using 699 technologies extracted from 10-K filings, the authors find a firm is more likely to mention a technology after its direct competitors used that technology in the prior year. This peer-to-firm diffusion is significantly stronger in dense competitor director networks and intensifies further when legal incentives make leakage less costly. The evidence links boardroom connectivity to the transmission of specific technologies, rather than only to broad convergence in product-market outcomes.

These effects of board-network spillovers reverse when the linked firms have product-market complementarities instead of being direct competitors. When overlapping directors connect more distant peers—firms in the top 5% but outside the top 1% of product similarity—denser director networks have positive effects. These networks are associated with greater differentiation, higher ROA, higher valuations, and more valuable patents. Information flows seem to destroy value when they link close substitutes, but they create value when they connect firms with more complementary assets. This contrast helps clarify the economic interpretation. The problem is not board connectivity itself; it is connectivity among firms competing over the same technologies and customers.

The paper suggests the negative effects reported are the consequence of industry participants’ inability to coordinate, representing a case of the classic “prisoner’s dilemma” in economic theory: in a dense competitor network, each firm may want access to rivals’ ideas once other firms are already connected. Yet the collective result is a market in which proprietary technologies circulate more widely, and innovation loses part of its differentiating value, negatively impacting all firms.