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Stock Market Reaction to the Appointment of Outside Directors

Authors

  • Steve Lin,

  • Peter F. Pope,

  • Steven Young

    Corresponding author
      Steven Young, The Management School, Lancaster University, Lancaster LA1 4YX, UK.
      e-mail: s.young@lancaster.ac.uk
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       The first author is from the Department of Accounting and Finance, Manchester University. The second and third authors are from the International Centre for Research in Accounting, Lancaster University. They are grateful to Ken Peasnell and an anonymous referee for their comments and suggestions. Financial support was provided by The Leverhulme Trust and the Economic and Social Research Council (contract no. H53627500497). (Paper received September 2001, revised and accepted February 2002)


Steven Young, The Management School, Lancaster University, Lancaster LA1 4YX, UK.
e-mail: s.young@lancaster.ac.uk

Abstract

This paper examines the UK stock market's reaction to the appointment of outside (non-executive) board members. Tests conducted using a sample of 714 appointments reported by EXTEL between 1 July, 1993 and 31 December, 1996, indicate a strong interaction between appointee characteristics and the magnitude of the agency problem: the share price reaction to outside director appointments is significantly more favourable when board ownership is low and the appointee possesses strong ex ante monitoring incentives. In contrast, the appointment of independent and manager-affiliated outside directors does not appear to benefit shareholders on average, even in the presence of serious agency problems.

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