Bank Executives as Outside Directors: An Empirical Study of NYSE and AMEX Director Appointments

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Corporate governance research concerning the board of directors has traditionally focused mainly on how effectively board directors monitor the firm’s management. Less attention has been given to the second important function of the board: the provision of expertise and knowledge. In order to investigate how stock market participants value this function, Fich (2004) studies whether investors react differently depending on the appointed director’s background. Previous wealth effect studies treating all appointees as a homogenous group fail to establish a significant stock market reaction. Fich, however, finds that the market does seem to discriminate between board directors. Specifically, she finds that investors generally favor financial executives over other directors from other professional backgrounds. She does not, however, set out to explore this phenomenon. In this study I will attempt to bring clarity to this matter. Using an event study, I investigate 39 director appointments where commercial bank executives are nominated to the boards of non-financial firms in the United States for the period 1990-2004. I find a significant effect on the share price of the non-financial firms on the announcement date; the average abnormal return is 0.80 % and significant at the 5 % level. Using cross-sectional regression analysis, I further investigate two potential explanations for the observed attractiveness of commercial bank executives– their specific debt market expertise versus a more general c...