The Shareholder Wealth Effects of Director Departure Announcements

Working Paper Series in Finance 00-08

THE SHAREHOLDER WEALTH EFFECTS OF DIRECTOR DEPARTURE ANNOUNCEMENTS E. Welch* G.A. Fleming** R.A. Heaney** * School of Banking and Finance, University of New South Wales **Department of Commerce, Australian National University

JEL Classification Keywords Last revision date: Contact author:

G34; L20. Corporate governance; board of directors; insider versus outsider directors. August 2000 Grant Fleming Department of Commerce The Australian National University Canberra ACT 0200 AUSTRALIA Telephone: 02 6249 2269 (International +61 2 6249 2269) Facsimile: 02 6249 5005 (International +61 2 6249 5005) Email: Grant.Fleming@anu.edu.au

The working paper series is for manuscripts in draft form. Comments are welcome and should be sent to the contact author. Please do not quote without permission. © Copyright 2000 E. Welch, G.A. Fleming, and R.A. Heaney

THE SHAREHOLDER WEALTH EFFECTS OF DIRECTOR DEPARTURE ANNOUNCEMENTS E. Welch* G.A. Fleming** R.A. Heaney** * School of Banking and Finance, University of New South Wales **Department of Commerce, Australian National University

Abstract While executive directors are responsible for superior performance, their behaviour may not always be aligned with shareholder interests. Non-executive directors provide one method of monitoring and controlling these and other agency costs. An event study focusing on director departure provides some insight into the economic importance of directors to shareholders. Initial results highlight both the importance of non-executive directors relative to other directors and the possibility of performance and size impacts. Multivariate tests suggest that non-executive director departures, especially when combined with resignation, explain the cross-sectional variation in share returns associated with director departure even after controlling for performance and size.

Acknowledgements We express our appreciation to the participants at the 2000 AAANZ conference,...