Does the Appointment of the Outside Director Increase Firm Value? The Evidence from Taiwan

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.