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Stock Price Impacts of Management Changes

Posted in Animal Spirits, Fundamental Valuation

A reader observed and asked: “I read today that Peter Dolan, the CEO of Bristol-Myers Squibb (BMY), left the company…BMY was up nearly 4% at the open. How many other times have CEOs of unprofitable/unloved publicly traded companies gotten sacked and the share price rises on the news? Could this be a market inefficiency that market makers and traders (i.e., hedge funds) exploit to the chagrin of individual and institutional investors (mutual funds)? Does a publicly traded company with a stock price stagnant for years get a trader’s premium when a management change occurs?”


The following studies derived from a search of the Social Science Research Network are relevant:

From a September 2003 study entitled “The Impact of CEO Turnover on Equity Volatility” by Matthew Clayton, Jay Hartzell and Joshua Rosenberg, based on a sample of 872 CEO turnovers at publicly traded companies during 1979-1995:  Stock price “volatility increases following a CEO turnover, even…when a CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility [an increase of 24% in the first year] more than voluntary turnovers [an increase of 10% in the first year], which we argue is consistent with forced departures implying a higher probability of large strategy changes. For voluntary departures, outside successions increase volatility more than inside successions, which we attribute to increased uncertainty over the successor CEO’s skill in managing the firm’s operations. We also document a greater stock-price response to earnings announcements following CEO turnover, consistent with more informative signals of value driving the increased volatility.”

From an October 2000 study entitled “Earnings and Impression Management in Financial Reports: The Case of CEO Changes” by Jayne Godfrey, Paul Mather and Alan Ramsay, based on a sample of 63 publicly traded Australian companies which experienced a change in CEO during 1992-1998: “In the year of CEO change, we hypothesise and find evidence of downward earnings management… As posited, we find evidence of upward earnings management and favourable impression management in the year after a CEO change. These results are strongest for the sub-sample where the CEO change was due to a resignation rather than a retirement.”

From an August 2000 study entitled “Share Price Reactions to CEO Resignations and Large Shareholder Monitoring in Listed French Companies” by Isabelle Dherment-Ferere and Luc Renneboog, based on a sample of 235 publicly traded French companies which experienced a change in CEO during 1988-1992: “The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. …Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance.”

In summary, past research indicates that there may be a good short-term price trade (but watch out for frontrunning) and a good longer-term volatility play for forced resignation of a CEO with replacement by an outsider.

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