The Signaling Effect of Independent Director Appointments

We examine the value relevance of voluntary versus mandatory independent director appointments based on market reaction. Our analytical model proposes that the market expects voluntary appointments to bring more positive value than mandatory appointments since voluntary appointments signal the integrity of the firm, and this signaling effect is more obvious for firms in which the market recognizes the existence of severe agency problems. Using a unique empirical setting in Taiwan, we find that voluntary appointments are associated with higher abnormal returns from appointment announcements, particularly for firms with severe agency problems, as indicated by the deviation between ownership and control.