IDEAS home Printed from https://ideas.repec.org/p/bsl/wpaper/2011-10.html
   My bibliography  Save this paper

Are forced CEO turnovers good or bad news?

Author

Listed:
  • Kind, Axel
  • Schläpfer, Yves

    (University of Basel)

Abstract

To gain insights about the quality of board's firing decisions, we investigate abnormal stock returns and operating performance around CEO-turnover announcements in a new handcollected sample of 208 "clean" turnover events between January 1998 and June 2009. Unlike the majority of previous studies, we show that forced turnovers do not per se represent a positive signal to shareholders. On the contrary, investors seem to critically assess the board's firing decision by considering the quality of the departing manager. When an outperforming CEO is dismissed or forced to leave - an event that occurs in as many as 35% of all dismissals in our sample - shareholders disesteem the board's decision. This finding is confirmed in multivariate cross-sectional regressions, holds for different time subperiods, and is robust to various event-test specifications and proxies of CEO quality.

Suggested Citation

  • Kind, Axel & Schläpfer, Yves, 2011. "Are forced CEO turnovers good or bad news?," Working papers 2011/10, Faculty of Business and Economics - University of Basel.
    • Handle: RePEc:bsl:wpaper:2011/10
    as

    Download full text from publisher

    File URL: https://edoc.unibas.ch/62733/1/20180404155903_5ac4da273de7b.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ruback, Richard S., 1982. "The effect of discretionary price control decisions on equity values," Journal of Financial Economics, Elsevier, vol. 10(1), pages 83-105, March.
    2. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
    3. Bruce Johnson, W. & Magee, Robert P. & Nagarajan, Nandu J. & Newman, Harry A., 1985. "An analysis of the stock price reaction to sudden executive deaths : Implications for the managerial labor market," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 151-174, April.
    4. Ertugrul, Mine & Krishnan, Karthik, 2011. "Can CEO dismissals be proactive?," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 134-151, February.
    5. Amanda L. Coxbill & Lee W. Sanning & Sherrill Shaffer, 2009. "Market reaction to the announcement of a male-to-female CEO turnover," CAMA Working Papers 2009-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Patell, Jm, 1976. "Corporate Forecasts Of Earnings Per Share And Stock-Price Behavior - Empirical Tests," Journal of Accounting Research, Wiley Blackwell, vol. 14(2), pages 246-276.
    7. Robert Neumann & Torben Voetmann, 2005. "Top executive turnovers: Separating decision and control rights," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 25-37.
    8. Xin Chang & Sudipto Dasgupta & Gilles Hilary, 2006. "Analyst Coverage and Financing Decisions," Journal of Finance, American Finance Association, vol. 61(6), pages 3009-3048, December.
    9. Adams, John C. & Mansi, Sattar A., 2009. "CEO turnover and bondholder wealth," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 522-533, March.
    10. Barber, Brad M. & Lyon, John D., 1996. "Detecting abnormal operating performance: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 41(3), pages 359-399, July.
    11. Jay Dahya & A. Alasdair Lonie & David M. Power, 1998. "Ownership Structure, Firm Performance and Top Executive Change: An Analysis of UK Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9‐10), pages 1089-1118, November.
    12. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
    13. Suchard, Jo-Ann & Singh, Manohar & Barr, Robert, 2001. "The market effects of CEO turnover in Australian firms," Pacific-Basin Finance Journal, Elsevier, vol. 9(1), pages 1-27, January.
    14. Jay Dahya & A. Alasdair Lonie & David M. Power, 1998. "Ownership Structure, Firm Performance and Top Executive Change: An Analysis of UK Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9-10), pages 1089-1118.
    15. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    16. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    17. Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 337-355, September.
    18. Cools, Kees & Mirjam van Praag, C., 2007. "The value relevance of top executive departures: Evidence from the Netherlands," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 721-742, December.
    19. Furtado, Eugene P. H. & Rozeff, Michael S., 1987. "The wealth effects of company initiated management changes," Journal of Financial Economics, Elsevier, vol. 18(1), pages 147-160, March.
    20. DeAngelo, Linda Elizabeth, 1988. "Managerial competition, information costs, and corporate governance : The use of accounting performance measures in proxy contests," Journal of Accounting and Economics, Elsevier, vol. 10(1), pages 3-36, January.
    21. Mark R. Huson & Robert Parrino & Laura T. Starks, 2001. "Internal Monitoring Mechanisms and CEO Turnover: A Long‐Term Perspective," Journal of Finance, American Finance Association, vol. 56(6), pages 2265-2297, December.
    22. Dedman, Elisabeth & Lin, Stephen W. -J., 2002. "Shareholder wealth effects of CEO departures: evidence from the UK," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 81-104, January.
    23. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    24. Kang, Jun-Koo & Shivdasani, Anil, 1996. "Does the Japanese Governance System Enhance Shareholder Wealth? Evidence from the Stock-Price Effects of Top Management Turnover," The Review of Financial Studies, Society for Financial Studies, vol. 9(4), pages 1061-1095.
    25. McCahery, Joseph A. & Moerland, Piet & Raaijmakers, Theo & Renneboog, Luc (ed.), 2002. "Corporate Governance Regimes: Convergence and Diversity," OUP Catalogue, Oxford University Press, number 9780199247875.
    26. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
    27. Randolph P. Beatty & Edward J. Zajac, 1987. "Ceo change and firm performance in large corporations: Succession effects and manager effects," Strategic Management Journal, Wiley Blackwell, vol. 8(4), pages 305-317, July.
    28. Peter Wells, 2002. "Earnings management surrounding CEO changes," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 42(2), pages 169-193, June.
    29. Pourciau, Susan, 1993. "Earnings management and nonroutine executive changes," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 317-336, April.
    30. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
    31. Corrado, Charles J., 1989. "A nonparametric test for abnormal security-price performance in event studies," Journal of Financial Economics, Elsevier, vol. 23(2), pages 385-395, August.
    32. Wei Shen & Albert A. Cannella,, 2003. "Will succession planning increase shareholder wealth? evidence from investor reactions to relay CEO successions," Strategic Management Journal, Wiley Blackwell, vol. 24(2), pages 191-198, February.
    33. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    34. Matthew C. Clayton & Jay C. Hartzell & Joshua Rosenberg, 2005. "The Impact of CEO Turnover on Equity Volatility," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1779-1808, September.
    35. Bhushan, Ravi, 1989. "Firm characteristics and analyst following," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 255-274, July.
    36. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
    37. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    38. Boehmer, Ekkehart & Masumeci, Jim & Poulsen, Annette B., 1991. "Event-study methodology under conditions of event-induced variance," Journal of Financial Economics, Elsevier, vol. 30(2), pages 253-272, December.
    39. Dahya, Jay & McConnell, John J., 2005. "Outside directors and corporate board decisions," Journal of Corporate Finance, Elsevier, vol. 11(1-2), pages 37-60, March.
    40. Coughlan, Anne T. & Schmidt, Ronald M., 1985. "Executive compensation, management turnover, and firm performance : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 43-66, April.
    41. Denis, David J & Denis, Diane K, 1995. "Performance Changes Following Top Management Dismissals," Journal of Finance, American Finance Association, vol. 50(4), pages 1029-1057, September.
    42. Khanna, Naveen & Poulsen, Annette B, 1995. "Managers of Financially Distressed Firms: Villains or Scapegoats?," Journal of Finance, American Finance Association, vol. 50(3), pages 919-940, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefano D'Addona & Axel Kind, 2011. "Forced Manager Turnovers In English Soccer Leagues: A Long-Term Perspective," Working Papers 1011, CREI Università degli Studi Roma Tre, revised 2011.
    2. Janina Kleinknecht & Daniel Würtenberger, 2022. "Information effects of managerial turnover on effort and performance: Evidence from the German Bundesliga," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(3), pages 791-812, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul Farah & Hui Li, 2021. "CEO Turnovers: Transparency of Announcements and the Outperformance Puzzle," IJFS, MDPI, vol. 9(3), pages 1-22, June.
    2. (Jianqiu) Bai, John & Mkrtchyan, Anahit, 2023. "What do outside CEOs really do? Evidence from plant-level data," Journal of Financial Economics, Elsevier, vol. 147(1), pages 27-48.
    3. Dedman, Elisabeth & Lin, Stephen W. -J., 2002. "Shareholder wealth effects of CEO departures: evidence from the UK," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 81-104, January.
    4. Stefano d’Addona & Axel Kind, 2014. "Forced Manager Turnovers in English Soccer Leagues," Journal of Sports Economics, , vol. 15(2), pages 150-179, April.
    5. Cools, Kees & Mirjam van Praag, C., 2007. "The value relevance of top executive departures: Evidence from the Netherlands," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 721-742, December.
    6. Hadem, Michael, 2010. "Bedingungen und Konsequenzen des Wechsels von Finanzvorständen - Eine Analyse in großen börsennotierten Unternehmen," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 43681, July.
    7. Pessarossi, Pierre & Weill, Laurent, 2013. "Does CEO turnover matter in China? Evidence from the stock market," Journal of Economics and Business, Elsevier, vol. 70(C), pages 27-42.
    8. Jalal, Abu M. & Prezas, Alexandros P., 2012. "Outsider CEO succession and firm performance," Journal of Economics and Business, Elsevier, vol. 64(6), pages 399-426.
    9. W Jane Cheung & Andrew B Jackson, 2013. "Chief Executive Officer departures and market uncertainty," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 279-310, August.
    10. Pessarossi, Pierre & Weill, Laurent, 2013. "Does CEO turnover matter in China? Evidence from the stock market," Journal of Economics and Business, Elsevier, vol. 70(C), pages 27-42.
    11. Dirk Jenter & Katharina Lewellen, 2021. "Performance-Induced CEO Turnover [The “Wall Street Walk” and shareholder activism: Exit as a form of voice]," The Review of Financial Studies, Society for Financial Studies, vol. 34(2), pages 569-617.
    12. Colak, Gonul & Liljeblom, Eva, 2022. "Easy cleanups or forbearing improvements: The effect of CEO tenure on successor’s performance," Journal of Financial Stability, Elsevier, vol. 63(C).
    13. Barbara Voußem & Utz Schäffer & Denis Schweizer, 2015. "Top management turnover under the influence of activist investors," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(3), pages 709-739, August.
    14. Lamoreaux, Phillip T. & Litov, Lubomir P. & Mauler, Landon M., 2019. "lead Independent Directors: Good governance or window dressing?," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 47-69.
    15. David Hillier & Patrick McColgan, 2009. "Firm Performance and Managerial Succession in Family Managed Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 461-484.
    16. ter Weel, Bas, 2006. "Does Manager Turnover Improve Firm Performance? New Evidence Using Information from Dutch Soccer, 1986-2004," IZA Discussion Papers 2483, Institute of Labor Economics (IZA).
    17. Nera Marinda Machdar, 2019. "Does CEO Turnover Affect Stock Market Performance through Company Performance in Indonesian Companies?," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 4(1), pages 15-21.
    18. Bas Weel, 2011. "Does Manager Turnover Improve Firm Performance? Evidence from Dutch Soccer, 1986–2004," De Economist, Springer, vol. 159(3), pages 279-303, September.
    19. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
    20. repec:zbw:bofitp:2012_021 is not listed on IDEAS
    21. Stefano D'Addona & Axel Kind, 2011. "Forced Manager Turnovers In English Soccer Leagues: A Long-Term Perspective," Working Papers 1011, CREI Università degli Studi Roma Tre, revised 2011.

    More about this item

    Keywords

    CEO turnover; corporate governance; firm performance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bsl:wpaper:2011/10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: WWZ (email available below). General contact details of provider: https://edirc.repec.org/data/wwzbsch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.