Abstract
We study the effect of corporate board independence on firm performance under different product market conditions. Using customer–supplier links to identify exogenous downstream demand shocks, we find that firm performance is positively associated with board independence when the firm-specific product demand drops. The results are stronger for smaller firms and firms with high growth and more volatile stock returns. The findings prevail if the firm faces a medium level of product market competition or a medium level of downstream demand shock. We provide suggestive evidence for the board's monitoring function driving the effectiveness of board independence in bad times of idiosyncratic risks, rather than its advisory function.
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