How do investors react to the appointment of board observers?

Purpose Board observers are non-voting board members without fiduciary duties, who are typically invited to board meetings, receive board materials and participate in board discussions. The purpose of this paper is to analyse investors’ reactions to the announcement of board observer appointments, and to determine whether certain individual characteristics influence investors’ reactions. Design/methodology/approach The authors use an event study methodology using cumulative abnormal returns (CARs) to estimate the share price reaction around board observer appointments. The authors use multivariate regressions and entropy balancing to test for differences in announcement returns within the board observer population. Findings Investors react positively to board observer appointments, suggesting that they are not marginalized in the absence of voting rights and fiduciary duties. This study’s results indicate that board observers providing resources and monitoring efforts receive more favourable stock market responses. Multivariate regressions and entropy balancing confirm this study’s findings. Practical implications This study has implications for board selection. The authors confirm that board observers add value to corporations, especially, if they provide resources and/or monitoring efforts to the board. Originality/value To the best of the authors’ knowledge, this is the first quantitative study to analyse board observer appointments in general and their impact on firm value.