Director Resignations, Firm Size and Signalling Effects

It is often difficult to predict how a change in a firm’s corporate governance structure will affect the future value of the firm. We examine what factors are associated with the level of stock market uncertainty surrounding a change in composition of the board of directors by investigating the variations in market reaction to a director resignation announcement. Market uncertainty is measured as the absolute value of the abnormal return accruing to firms that experience a director resignation. Multivariate analysis shows that the level of uncertainty about the economic impact of the director resignation is explained by firm size and the type of director leaving. Consistent with positive information costs and signalling theory, market uncertainty decreases with firm size and increases when the resignation is by a non-executive director. Acknowledgements: We express our thanks to Richard Heaney for helpful comments that formed the genesis of this paper.