We examine the stock market reaction to the announcement of outside director
appointments in Taiwan. We employ a sample of 58 outside director announcements
made by Taiwan Stock Exchange listed firms during the period 1 January, 1999 to 30
June, 2003. Using this data, we can test some important hypotheses regarding the role
of outside directors in conjunction with other conditions for corporate performance in
affecting the stock market reactions. Our empirical findings indicate that there exists
a significantly positive reaction to the announcements. The cumulative abnormal
returns ---one indicator of stock market reaction measured by using the methodology
of market model based event study --- reached 4.776%. We also find that the
abnormal returns are positive and higher with respect to each of the following
characteristics: poorer prior corporate performance, the CEO as chairman of the board,
larger free cash flow and a higher degree of information asymmetry. Further, we find
that the announcement effect is decreasing as number of outside directors increases.
Our findings are different from existing literature, for instance, those of Lin, Pope and
Young (2003) and Rosenstein and Wyatt (1990) mainly because the outside director
appointment is not mandatory in Taiwan. This suggests that the announcement effects
could be different across countries. The appointment appears to be more beneficial for
a country with poor corporate governance mechanisms.
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