Market Reaction to CEO Succession - PowerPoint Presentation

Slide1

Market Reaction to CEO Succession

Sarah Iselin

April 10, 2015Slide2

Revisiting the Performance Consequences of CEO Succession: The Impacts of Successor Type,

Postsuccession

Senior Executive Turnover, and Departing CEO Tenure

Published August 2002

Wei Shen, University of Florida and Albert A.

Cannella

, Jr., Texas A&M University

Data:

Publicly traded U.S. corporations

Reporting at least $200 million in sales for 1988

Final sample 228 successions

159 follower successions (Inside executive)

41 contender successions (Inside executive)

28 outsider successions (Outside the firm)Slide3

Hypotheses

Based on three types of successors:

followers, contenders, outsiders

H1

:

Contender successors

will be

positively

associated with

postsuccession

operational performance

H2

:

Outsider successors

will be

negatively

associated with

postsuccession

operational performance

H3:

Senior executive turnover

following a

contender succession

will be

positively

associated with post succession operational

performance

H4: Senior executive turnover following an

outside succession

will be

negatively

associated with post succession operational

performance

.

H5

: There will be an inverted U-shaped relationship between departing CEO tenure and

postsuccession

operational performance.Slide4

Conclusions

Senior executive turnover has a positive impact on firm ROA in contender succession but a negative impact in

outsider succession. Slide5

Stock Market Reactions and Firm Performance Surrounding CEO Succession: Antecedents of Succession and Successor Origin

Published

Spring 2006

Jong C.

Rhim

, University of Southern Indiana, Joy V.

Peluchette

, University of Southern Indiana,

Inam

Song, Daejeon University, South Korea

Data:

800 firms listed with top 800 highly paid CEO’s reported in

Forbes,

1995.

858 CEO successions from 1977 to 1994

CEO succession verified with dates

Firms in utility industry removed from sample (high regulation)

Financial information found in three specific databases

Financial information available for seven years around CEO announcement

CEO demographic information available

Final sample: 211 CEO successions, 40 different industriesSlide6

Hypotheses

H1

: The stock market reacts more favorably to

unanticipated

CEO succession announcements than to

anticipated

CEO succession announcements.

H2

: Favorable stock market reactions to

unanticipated

CEO succession announcements reflect, on average, the improved financial performance of the firm in the

post-succession period

.

H3

: Firms with

insider succession

, on average, financially perform better during the post-succession than the firms with

outsider succession

.

*Three periods range from 60 days before and 59 days after announcement. Announcement period consists of Day 0 and Day 1.Slide7

Conclusions

The average daily abnormal return were 0.3843 percent for the announcement period

0.0040% pre-announcement period

0.0289% post-announcement period

Significant positive abnormal return during the two-day announcement period suggests the stock market reacted favorable to the announcement of CEO.

For 33 successions due to unanticipated events, average daily abnormal return was 0.9241%

Average daily abnormal return for anticipated succession during the same period was 0.2249%

For 71 successions by firms categorized by performing below industry median during prior 3 years, average daily abnormal return was 0.5470%, compared to 0.3027 of “good” performing companies, but was not significant at the 0.05 level, and does not support H2. Slide8

The Market Reaction to the Appointment of an

O

utside CEO: An Empirical Investigation

Published

September 2010

Melita

Charitou

, Andreas

Patis

and

Adamos

Vlittis

, University of Nicosia, Cyprus

Data used

158 U.S. firms

Listed in S&P 500 and S&P

MidCap

400

Appointed outside CEO from 1993-2005

Hypothesis: The

market reactions to the announcement of the outside CEO appointment is expected to be, on average, positive. Slide9

Conclusion

Studied the window of two days before announcement and one day after the announcement.

Results indicated that positive abnormal returns exist around the announcement of an outside CEO appointment.

These announcements of appointments are beneficial to investors. Slide10

RecommendationsSlide11

The Process

Find companies announcing new CEOs

Search Engine: “New CEO”

Wall Street Journal

Bloomberg.com/Leaders

Take long position on companies with CEO announcements

Outside CEO announcements more favorableSlide12

Client Portfolio

Sotheby’s CEO announcement: March 16, 2015

Purchased Sotheby’s Stock on March 16 for $40.96

By March 24, Stock Price: $43.28

Sotheby’s Stock Price Now: $41.50

Shorted Madison Square Garden Company (MSG) for $77.02 a share

March 24: Covered Madison Square Garden for $80.65

MSG CEO Announcement was originally March 1Slide13

Questions and Comments?

Thank you.Slide14

Sources:

Rhim

, Jong C., Joy V.

Peluchette

, and

Inam

Song. "Stock Market Reactions and Firm Performance Surrounding CEO Succession: Antecedents of Succession and Successor Origin." 

Mid - American Journal of Business

 21.1 (2006): 21-30. 

ProQuest. 

Web. 3 Apr. 2015

.

Revisiting the Performance Consequences of CEO Succession: The Impacts of Successor Type,

Postsuccession

Senior Executive Turnover, and Departing CEO

Tenure. Wei

Shen and Albert A.

Cannella

Jr.

The

Academy of Management

Journal

. Vol

. 45, No. 4 (Aug., 2002), pp.

717-733.

The market reaction to the appointment of an outside CEO: An empirical

investigation.

Charitou

,

Melita

;

Patis

, Andreas;

Vlittis

,

Adamos

. Journal of Economics and International Finance2.11 (Nov 2010): 272-277.