Reaction to CEO turnover and share prices

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.