Competitive differentiation effects of board network distance

Purpose This study explores how changes in board network distance, formed by overlapping directors, impacts competitive differentiation between firms. Design/methodology/approach The authors introduce a board network distance measure by calculating the minimum number of directors required to connect two boards. By exploiting exogenous variations due to director deaths and their impact on board network distance, the authors examine how competitive differentiation between firms changes. Findings The authors find that firms whose boards are closer in the board network, are more differentiated in terms of product segment shares, product descriptions, patenting and patent citations. The results also hold for connections to third-party firms not directly affected by a director death. One plausible explanation is information sharing for differentiation, under which, closely connected firms access more credible information on potential competitors. Research limitations/implications The paper’s findings suggest that board networks are a significant source of information sharing between firms, even when boards are not directly connected by an overlapping director. While prior research has indicated that board networks can lead to collusive outcomes, the findings of this paper suggest that an alternative information-sharing mechanism is also possible. Practical implications Firms should recognize that indirect board ties – not just shared directors – can meaningfully shape competitive positioning. Appointing directors with broad and strategically valuable network connections may enhance access to credible, non-public information on competitors or market trends. Originality/value This paper introduces the notion that indirect connections between boards are important for information sharing. Prior works generally found that closer boards tend to lead firms to be more similar in terms of corporate financial policies. This study finds that closer boards tend to share more credible information on their potential competitors, which they might unilaterally use to competitively differentiate.