Market reactions to CEO turnovers : empirical study on the market reaction to a CEO turnover

2015

This thesis examines the effect of CEO attributes and company fundamentals on

company performance in CEO turnovers. The analyses were performed on a sample

of 899 CEO turnovers between 2003 and 2009 in companies listed on the S&P 1500

composite index in the US. A six-step model exploring various perspectives of the

CEO turnover in the period [Event day -1/+2 years] finds that the market, on

average, yields negative announcement return and then positive cumulative

abnormal return in the subsequent two years. Our main finding is that the market

reacts to changes made to the company fundamentals, and that it generally

rewards changes in company fundamentals contributing to enhance the robustness

of the companies’ balance sheets. We find that MBAs tend to run the operations

with lesser margins, in terms of balance sheet robustness. Nonetheless, the different

behavior between MBAs and engineers does not explain the market reaction. Even

though MBAs and engineers have different fiscal strategies in the way they operate

companies, the abnormal return is not sensitive to hiring a CEO with these

educational profiles alone. It is rather the experience, and the fact that CEOs, on

average, are able to introduce changes that fit the companies’ needs that appear to

generate abnormal reactions in stock value. We also find that positive abnormal

stock return in the transition year materializes in increased ROA and EBITDA margin

in the two subsequent years. This confirms that the market is able to identify CEO

turnovers that prove successful. This thesis confirms several previous findings within

the research field of CEO turnover, and adds to the understanding of the underlying

reasons for market reactions to CEO turnovers.