Stock Price Reaction to Supervisory Board Interventions: Empirical Evidence from Germany

Abstract

Within the discussion about an efficient corporate governance system, considerable attention has been paid to the supervisory board’s responsibility to monitor top executives raising the question about the value relevance of supervisory board’s actions (i.e., control). We conduct an event study analyzing the effect of supervisory board interventions on the value of publicly listed firms in Germany between 2000 and 2006. With our study, we are among the first to empirically test two suppositions by Hermalin Weisbach (1998) which propose a negative stock price reaction when the CEO is fired based on private information of the supervisory board and a positive stock price reaction when the CEO is fired based on public information. Assuming that the amount of information available to the public increases with the media coverage of a company, we expect effects to differ depending on the company’s level of media coverage. This is confirmed by our empirical results: Looking at companies receiving low media coverage, we find a negative and significant effect of supervisory board interventions on firm value. Focusing on companies with high media coverage we find that supervisory board interventions have a positive effect on stock prices which is also significant when returns are cumulated over several days. These results supporting the predictions of Hermalin Weisbach (1998) prove to be robust when controlling for company characteristics (in particular size) in a multivariate regression setting.