Shareholder wealth effects when an officer of one corporation joins the board of directors of another

Stuart Rosenstein and Jeffrey G. Wyatt

Managerial and Decision Economics, 1994, vol. 15, issue 4, 317-327

Abstract: Officers of large corporations, having demonstrated expertise in managing complex organizations, would appear to be ideal additions to the boards of directors of other corporations. Shareholder wealth effects are examined for 124 announcements in which an officer of one public corporation joins the board of directors of another. The results indicate that the values of nonfinancial firms that send directors to other firms decline significantly, while those of financial senders increase significantly. Receiving firms of both types do not gain. The results suggest that for nonfinancial firms the added duties of an outside directorship distract corporate officers from managing their own firms or are signals to the market that managers are available to other firms. For financial senders, the benefits of networking appear to strongly outweigh any drawbacks. Cross-sectional regressions suggest that prediction errors are higher for receiving firms if they have performed poorly prior to the announcement and less negative for sending firms if they have performed well prior to the announcement. Abnormal returns are negatively related to the size of the sender, adding support for the notion that busy executives are less valuable as outside directors.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:15:y:1994:i:4:p:317-327

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