The shareholder wealth effects of an executive joining another company's Board

Abstract

Purpose

The purpose of this paper is to examine the impact of high‐level‐executives joining the Board of another US company on the shareholder wealth of the firms in which these executives work.

Design/methodology/approach

The “event‐study” methodology is used first to estimate the shareholder effects and then, through multivariate regression analysis, establish a relationship of these effects with executive characteristics.

Findings

The paper documents that the abnormal return becomes more positive the closer the executive is to retirement and more negative as the number of other corporate Boards the executive already sits on increases. Unlike previous research, it is not found that prior performance of the employing company helps explain the cross‐sectional variation in the announcement day abnormal returns.

Research limitations/implications

The result supports the concerns of shareholder activists that key executives joining the Boards of other companies do their home shareholders a disservice by being spread too thin. It supports the hypothesis that investors interpret a CEO joining the Board of another firm as value decreasing.

Originality/value

The paper provides a link between managerial labor and shareholder wealth. Important and high‐level‐executives, while attempting to enhance their own personal benefits by joining other Boards, can destroy shareholder value of the company for which they work.

Citation

Byrd, J., Martin, L.A. and Rath, S. (2010), "The shareholder wealth effects of an executive joining another company's Board", International Journal of Managerial Finance, Vol. 6 No. 1, pp. 48-57. https://doi.org/10.1108/17439131011015788