Reaction to CEO turnover and share prices
Date
2011-04-13
Authors
Grigorov, Vladimir
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Abstract
There have been numerous studies investigating the problem of CEO departure
and concomitant market reaction around the world. In some instances the
market reaction is favourable; in others not. Throughout the various business
cycles and economic conditions the quality of management is usually maintained
by internal or external mechanisms of governance. A variety of factors, such as
the board of directors, the shareholders, and the discipline of the debt markets,
put constant pressure on the behaviour of management and the decisions they
make (Puffer & Weintrop, 1991:38).
In situations where the performance of the management has significantly
deviated from the expectations of the market and the shareholders, the departure
of the CEO has had a positive effect on the share price. In other instances the
voluntary departure, or the unexpected death of a CEO, causes a negative price
reaction.
The purpose of the research is to assess the relationship between the departure
of a company’s CEO and the share price reaction of the South African
companies listed on the JSE (JSE Securities Exchange).
In this study, in the form of an events study, the researcher calculated the
cumulative average abnormal returns in an event window of -7 to +7 days. The
population sample comprised 46 CEO departure announcements made by the
media, over the past six years (2003-2008). The research aimed at establishing
if there was any significant difference in the returns (stock reaction) before and
after the announcement.
The outcomes of event studies conducted regarding management changes are
controversial. For example, Borstadt (1985) finds a negative market reaction to
announcements made for managerial departures. Furtado and Rozeff (1987)
find the opposite - a positive reaction when there is a new top managerial
appointment. Weisbach (1988) finds a positive reaction to the news of the
departure of the CEO (excluding those who retire), while Furtado (1986) finds
that there is a negative effect on stock prices due to resignation announcements.
All these findings can be related to the various hypotheses posited in this study.
The findings of this study are as follows:
There is a statistically significant move in the cumulative abnormal returns on
the day of the announcement of the departure.
There is a statistically significant move in the cumulative abnormal returns
when there is a sudden departure of a CEO of a company.
There is a statistically significant negative abnormal return when there is an
insider replacement. At the same time, the research showed that an outside
replacement has no effect on the cumulative abnormal returns in a South
African company.
There is a statistically significant difference in the cumulative abnormal
returns when there is no immediate replacement of the ousted CEO in a
South African company.
There is a statistically significant negative return in the event of the retirement
of a CEO.
Given the evidence, one can see that with the exception of the outsider
replacement scenario, in all other cases there are statistically significant
abnormal returns with CEO turnover in South African companies.
Description
MBA - WBS
Keywords
Share prices, Chief executive officers