New Entry Threats and Firm Performance in the IT Industry: The Moderating Role of Board Independence

Abstract

The Information Technology (IT) industry is characterized by rapid technological change and fast-moving dynamics, a significant part of which may be attributed to entrepreneurial ventures that pioneer new innovations. Correspondingly, the rate of new entry in the form of entrepreneurial ventures poses a critical risk factor for incumbent IT firms. While theoretical work points out a negative relationship between new entry threats (NET) and firm performance, empirical findings are scarce due to the inability to measure NET properly. Leveraging a novel NET measure based on text-mining approaches, we show that a higher level of NET indeed leads to a drop in the incumbent’s performance. We also show that facing high NET, firms with more independent directors are better able to withstand these threats, possibly due to stronger monitoring and the valuable resources and information provided by the independent directors. Effectively, we circumscribe a set of boundary conditions under which board governance mechanisms may contribute to firm performance. To address the endogeneity issues associated with board independence, we use the enactment of the Sarbanes-Oxley Act and related changes to the NYSE/NASDAQ listing rules as exogenous shocks to create instruments, and our results are robust to the instrumental variable regressions. Further, we show that our findings are generalizable to other high tech industries, and discuss the implications for research and practice.