To read this content please select one of the options below:

The market reaction to the appointment of outside directors: An analysis of the interaction between the agency problem and the affiliation of directors

Abeyratna Gunasekarage (Department of Accountancy, Finance and Information Systems, University of Canterbury, Christchurch, New Zealand)
Debra K. Reed (Department of Accountancy, Finance and Information Systems, University of Canterbury, Christchurch, New Zealand)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 26 September 2008

1516

Abstract

Purpose

The purpose of this study is to examine the character of any market response to the appointment of outside directors. The main propositions tested are: whether the stock market responds unconditionally to these appointments or whether the market response is conditional on the degree of the agency problem faced by the firm and the affiliation of the appointees.

Design/methodology/approach

The authors use a New Zealand sample of the appointments of outside directors during the period from July 1999 to June 2004. The unconditional market response is examined analysing the abnormal returns generated by the appointing companies during the three‐day announcement period. The influences of the agency problem and the affiliation of directors are tested by employing multiple regressions.

Findings

The findings provide strong support for the second proposition; the market considers the degree of the agency problem faced by the firm and the affiliation of outside directors in responding to these appointments. The percentage of outside directors in the board emerged as the strongest governance mechanism which, together with firm size, posed a significant inverse influence on announcement period abnormal returns. A strong interaction effect between appointee status and the agency problem was not present.

Originality/value

The mere appointment of outside directors may not please the firm's investors. Such appointments are more useful for companies with severe agency conflicts; even if such a conflict is present, the affiliations that these outside directors have with the executives and the operations of the appointing companies may need to be considered in determining the value of such appointments.

Keywords

Citation

Gunasekarage, A. and Reed, D.K. (2008), "The market reaction to the appointment of outside directors: An analysis of the interaction between the agency problem and the affiliation of directors", International Journal of Managerial Finance, Vol. 4 No. 4, pp. 259-277. https://doi.org/10.1108/17439130810902787

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

Related articles