CEO succession and stockholder reaction: do demographic characteristics matter?
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This dissertation explores the immediate shareholder wealth effects of executive succession events using the event study methodology and hierarchical regression. Others have investigated “Who shall succeed?” and answered that question in terms of the characteristics a new CEO will have. The study presented here is an investigation of the consequences of that selection through the examination of the market response to these same characteristics of successor CEOs. The research has been guided by the following question: Does the announcement of a particular CEO successor, as defined by his characteristics, change investor judgments about a firm’s future prospects? Such a revision of judgments is expected to be reflected immediately in the price of the firm’s stock. By investigating CEO turnover among the Fortune 1000 firms from 1997- 2001, the present study shows that investors do consider the announcement of a new CEO a significant event. The findings support the common sense view of succession; that succession will have a positive influence on performance. On average, stock prices rise on the announcement of a new CEO. However, the personal characteristics of the new CEO appear to have little influence on that response. The primary results indicate that investors prefer a new CEO who is an outsider, but the inclusion of additional descriptive characteristics beyond the insider/outsider distinction does not significantly improve the ability to predict investor responses. However, analyses of the difference in the market’s response to a new CEO who was the “heir apparent” versus one whose appointment was not preordained are compelling. Consistent with efficient markets, the results show that the eventual appointment of an heir apparent is a non-event. However, appointment of a non-heir CEO is a highly significant event with positive excess returns of more than 3% in the two-day and three-day event windows. Once again, beyond a non-heir CEO’s status as an insider or outsider, the profile of that person does not seem to influence the market’s response.