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

Author

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  • John Byrd
  • L. Ann Martin
  • Subhrendu Rath

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.

Suggested Citation

  • John Byrd & L. Ann Martin & Subhrendu Rath, 2010. "The shareholder wealth effects of an executive joining another company's Board," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 6(1), pages 48-57, February.
    • Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:1:p:48-57
    DOI: 10.1108/17439131011015788
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    References listed on IDEAS

    as
    1. Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1111, June.
    2. Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
    3. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    4. Booth, James R. & Deli, Daniel N., 1996. "Factors affecting the number of outside directorships held by CEOs," Journal of Financial Economics, Elsevier, vol. 40(1), pages 81-104, January.
    5. Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1112, June.
    6. Eliezer M. Fich & Anil Shivdasani, 2006. "Are Busy Boards Effective Monitors?," Journal of Finance, American Finance Association, vol. 61(2), pages 689-724, April.
    7. Conyon, Martin J. & Read, Laura E., 2006. "A model of the supply of executives for outside directorships," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 645-659, June.
    8. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
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