How do investors react to the appointment of board observers?

Purpose: Board observers are non-voting board members without fiduciary duties, who are typically invited to board meetings, receive board materials and participate in board discussions. The aim of this paper is to analyse investors' reactions to the announcement of board observer appointments, and to determine whether certain individual characteristics influence investors' reactions. Design/methodology/approach: We employ an event study methodology using cumulative abnormal returns (CARs) to estimate the share price reaction around board observer appointments. We use multivariate regressions and entropy balancing to test for differences in announcement returns within the board observer population. Findings: Investors react positively to board observer appointments, suggesting that they are not marginalized in the absence of voting rights and fiduciary duties. Our results indicate that board observers providing resources and monitoring efforts receive more favorable stock market responses. Multivariate regressions and entropy balancing confirm our findings. Originality: This is the first quantitative study to analyse board observer appointments in general, and their impact on firm value. Practical implications: Our study has implications for board selection. We confirm that board observers add value to corporations, especially, if they provide resources and/or monitoring efforts to the board.