Y. S. Lee et al. International Review of Economics and Finance 8 1999 421–431 427
Table 2 Cumulative Average Prediction Errors CAPE and Test Statistics for the Two-day Announcement
Period AD-1, AD Surrounding Appointments of an Outside Director to the Board of a NYSE or AMEX Corporation as Reported in the Wall Street Journal “Who’s News” Section over the Period
1981–1985
positive over two-day announcement period
CAPE Z
statistic estimation period
Commercial bank 0.0056
1.48 0.59
b
N 5 73 0.48
Insurance 0.0022
0.26 0.46
N 5 39 0.48
Investment bank 0.0039
1.19 0.53
N 5 34 0.48
Total 0.0048
1.73
a
0.53 N 5 146
0.48
a
Statistically significant at the 0.10 confidence level two-tailed test.
b
Statistically significant at the 0.10 level for the standard test of proportions.
4.3. Statistical methods The announcement date AD is defined as the date that the announcement appears
in the “Who’s News” section of the Wall Street Journal. Standard event study methodol- ogy is used to measure abnormal returns. The market model is used for parameter
estimation, with the 150 trading day period AD-170, AD-21 used as the estimation period and the CRSP equally weighted index serving as the market index. The analysis
focuses on the 2-day announcement period AD-1, AD. See Furtado and Rozeff 1987 for a concise description of the method.
Two statistics are used to test the significance of prediction errors, the traditional parametric test statistic based on the 2-day cumulative standardized prediction error
3
CSPE, and the binomial test that the proportion of abnormal returns over the 2-day announcement period is different than the proportion of abnormal returns over the
estimation period.
5. Empirical results
Table 2 presents the 2-day cumulative average prediction errors CAPE and test statistics for the total sample and for each of the three types of financial outside
directors. For the overall sample, the 2-day CAPE is 0.0048, significant at the 0.10 level. This result supports the hypothesis that the appointment of a financial outside
director increases shareholder wealth. An examination of the subsamples indicates that the CAPE and the proportion of positive prediction errors for commercial banks
are greater than for the other groups; however, there is no statistically significant difference among the three groups.
428 Y. S. Lee et al. International Review of Economics and Finance 8 1999 421–431
Table 3 Cumulative Average Prediction Errors CAPE and Test Statistics for the Two-day Announcement
Period AD-1, AD Surrounding Appointments of an Outside Director to the Board of a NYSE or AMEX Corporation as Reported in the Wall Street Journal “Who’s News” Section over the Period
1981–1985
positive over two-day announcement period
Number CAPE
t-statistic estimation period
To large firm 73
20.000770 20.23
0.49 0.48
To small firm 73
0.010376 2.95
a
0.59
b
0.48 Commercial bank
40 20.000355
20.075 0.55
to large firm 0.48
to small firm 33
0.012775 2.55
a
0.64
b
0.48 Insurance
24 0.001485
0.28 0.42
to large firm 0.49
to small firm 15
0.003284 0.52
0.53 0.47
Investment bank 9
20.008625 20.86
0.44 to large firm
0.48 to small firm
25 0.011464
1.65 0.56
0.47 “Large” refers to firms that have greater than the median market value of equity at the end of the
month preceding the announcement for the sub-sample in question.
a
Statistically significant at the 0.05 confidence level two-tailed test.
b
Statistically significant at the 0.10 level for the standard test of proportions.
In Table 3, we examine prediction errors for larger and smaller than median-sized firms in the total sample and each of the three subsamples. In both the total sample
and the subsamples, it is clear that the overall results are attributable to the smaller firms, where the CAPE is 0.0104 and significant at the 0.05 level, while the CAPE
for the larger firms is 20.0008 and not statistically different from 0. For the smaller firms, although only appointments of commercial bankers are statistically significant
CAPE 5 0.0128, t 5 2.55, the results are qualitatively similar for investment bankers CAPE 5 0.0115, t 5 1.65. The CAPE is much smaller for directors from insurance
companies CAPE 5 0.0033, t 5 0.52.
The empirical results in Table 3 lend support for the hypothesis that outside directors from financial institutions are more valuable for smaller firms, perhaps because smaller
firms have less access to financial markets or are in greater need of the financial expertise supplied by financial outside directors. One alternative explanation is that
these announcements have less effect for large firms simply because large firms are in the news more frequently.
It is possible that the appointment of a financial director is a signal of private information about the firm. If so, the appointment of a commercial banker may signal
Y. S. Lee et al. International Review of Economics and Finance 8 1999 421–431 429
different information than the appointment of an investment banker. For example, the appointment of a commercial banker may signal that the firm is considering an
increase in financial leverage, consistent with non-negative abnormal returns. The appointment of an investment banker might signal that the firm is considering putting
itself up for sale, because both an equity issue and an acquisition would be expected to be associated with negative abnormal returns.
We conducted regression analysis to simultaneously account for firm size, event contamination other announcements occurring on or near the director announcement
date, and whether the new director is a replacement or expands the board. After controlling for these variables, we found no significant differences in abnormal returns
across the different types of directors. The coefficient on the natural logarithm of the market value of equity is negative and statistically significant at the 0.05 level two-
tailed test, in keeping with previous results. In the interest of brevity, regression results are omitted.
6. Conclusions
