Stock Market Reaction to the Appointment of Outside Directors

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.