The impact of CEO turnover on equity volatility
A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979-95 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers - a finding consistent with the view that forced departures imply a higher probability of large strategy changes. For voluntary departures, outside successions increase volatility more than inside successions. We attribute this volatility change 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. Our findings are robust to controls for firm-specific characteristics such as firm size, changes in firm operations, and changes in volatility and performance prior to the turnover.
|Date of creation:||2003|
|Contact details of provider:|| Postal: 33 Liberty Street, New York, NY 10045-0001|
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hertzel, Michael & Jain, Prem C., 1991. "Earnings and risk changes around stock repurchase tender offers," Journal of Accounting and Economics, Elsevier, vol. 14(3), pages 253-274, September.
- repec:bla:joares:v:30:y:1992:i:2:p:185-209 is not listed on IDEAS
- Bollen, Nicolas P. B., 1998. "A note on the impact of options on stock return volatility1," Journal of Banking & Finance, Elsevier, vol. 22(9), pages 1181-1191, September.
- 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.
- Brown, Keith C. & Harlow, W. V. & Tinic, Seha M., 1988. "Risk aversion, uncertain information, and market efficiency," Journal of Financial Economics, Elsevier, vol. 22(2), pages 355-385, December.
- Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1997. "Ownership structure and top executive turnover," Journal of Financial Economics, Elsevier, vol. 45(2), pages 193-221, August.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
- Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
- Dann, Larry Y. & Masulis, Ronald W. & Mayers, David, 1991. "Repurchase tender offers and earnings information," Journal of Accounting and Economics, Elsevier, vol. 14(3), pages 217-251, September.
- Dubofsky, David A, 1991. " Volatility Increases Subsequent to NYSE and AMEX Stock Splits," Journal of Finance, American Finance Association, vol. 46(1), pages 421-431, March.
- Weisbach, Michael S., 1995. "CEO turnover and the firm's investment decisions," Journal of Financial Economics, Elsevier, vol. 37(2), pages 159-188, February.
- Berkovitch, Elazar & Israel, Ronen, 1996. "The Design of Internal Control and Capital Structure," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 209-240.
- 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.
- Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 337-355, September.
- Hamid Mehran & David Yermack, 1996. "Stock-Based Compensation and Top Management Turnover," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-35, New York University, Leonard N. Stern School of Business-.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
- MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-1055, December.
- Mathias Dewatripont & Jean Tirole, 1994.
"A Theory of Debt and Equity: Diversity of Securities and Manager-Shareholder Congruence,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 109(4), pages 1027-1054.
- Mathias Dewatripont & Jean Tirole, 1994. "A theory of debt and equity: diversity of securities and manager-shareholder congruence," ULB Institutional Repository 2013/9593, ULB -- Universite Libre de Bruxelles.
- Vijh, Anand M, 1994. " The Spinoff and Merger Ex-date Effects," Journal of Finance, American Finance Association, vol. 49(2), pages 581-609, June.
- Ohlson, James A. & Penman, Stephen H., 1985. "Volatility increases subsequent to stock splits: An empirical aberration," Journal of Financial Economics, Elsevier, vol. 14(2), pages 251-266, June.
- Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
- Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
- Bonnier, Karl-Adam & Bruner, Robert F., 1989. "An analysis of stock price reaction to management change in distressed firms," Journal of Accounting and Economics, Elsevier, vol. 11(1), pages 95-106, February.
- Donders, Monique W. M. & Vorst, Ton C. F., 1996. "The impact of firm specific news on implied volatilities," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1447-1461, November.
- 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. Full references (including those not matched with items on IDEAS)