Abstract
This paper studies the interactions between corporate boards and major customers. Using the Sarbanes-Oxley Act of 2002 (SOX) and consequent governance reforms as a quasi-natural experiment, we find that SOX-affected firms diversify their customer bases by removing directors with business links to them. A one standard deviation decrease in the proportion of linked directors is associated with an 11.80% proportional decrease in the percentage of sales to all the major customers. SOX-affected firms enjoy lower overall and idiosyncratic risk post-SOX, possibly due to reduced hold-up risk. Our work provides novel evidence on how corporate boards affect firms' risk-taking behavior.
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