Vertical Interlock and Firm Value: The Role of Corporate Innovation

Abstract

This paper examines the impact of vertical interlock on firm value of listed firms in China. We find that vertical interlock significantly reduces firm value. Further, the negative effects are more pronounced when the type of vertical interlock is indirect and the interlocking position is board chairman. This association is robust to a series of robustness and endogeneity tests. Importantly, we find that reducing R&D investment caused by vertical interlock is tightly associated with the decline in firm value. Our results support the notion that vertical interlock appears to worsen corporate governance.

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