Director Motivational Orientations: How New Director Regulatory Focus Shapes Market Reactions

Abstract

We draw on regulatory focus theory and the governance literature to examine how and when shareholders react to the motivational orientations of newly appointed directors. We theorize that because directors high in promotion focus are likely to orient to the firm toward growth and maximize shareholder value, their appointments will generate positive market reactions. We also theorize that because the vigilance of directors high in prevention is likely to increase managerial risk-aversion and lead the firm to miss out on growth opportunities, the market will react negatively to their appointments. Further, we examine the moderating role of financial slack and industry munificence. Using a sample of 374 new director appointments by S&P 500 firms between 2004 and 2013, we find that shareholders favor directors high in promotion focus, and their reactions are amplified when financial slack is high. We also find that market reactions to directors high in prevention focus are contingent on whether the firm operates in industries high or low in munificence.