Binghamton University

Event Study: Stock Market Reactions to New CEO Announcement

ACCT 540 Financial Accounting Theory

Team # 105

Qin Li

Zhuting Meng

Xue Shao

Jie Yin

Yang Yang

2014/3/27

1

1. Introduction and Literature Review

1.1 Introduction

CEO, whose duty is to maximize shareholders’ wealth by making sensible decisions,

plays the most important role when it comes to the outlook and growth of a firm. His/her abilities,

preferences and decisions profoundly affect the firm by the projects the firm selects, its financial

policies, and the corporate culture. Regarding to empirical evidences, under ideal conditions,

capital markets should be informationally efficient, suggesting that market prices will fully and

unbiasedly reflect every publicly held information. Hence, a change in CEO is a significantly-

vital event of a firm, and the market should react to new CEO announcement.

In our study, we investigate market reactions toward new CEO announcement using

standard event study methodology. Firstly, based on the “Market Model”, we conduct our

analysis using 50 randomly-chosen US listed firms which have an announcement of CEO

succession during recent five years. The outcome shows a rough average Cumulative Abnormal

Return (CAR) of 1.5% on each day during the event window with a p-value of 0.0626, which

means that new CEO announcement induces a market movement with a 93.74% certainty.

Secondly, we examine six primary variables to explain the differential market reactions: the

company’s past performance, company size, the new CEO’s facial attractiveness, types of CEO

departure, new CEO’s gender, and the origin of successor. In addition, we conduct a subgroup

analysis filtered by the company’s past performance and types of departure. The result suggests

that the market reacts differently depending on whether an internal or external candidate is

nominated as CEO.

1.2 Literature Review

Top management change has always caught huge attention, and researches from various

fields have been conducted. Many scholars have performed event studies of management

turnover. Although the findings of those studies are sometimes in conflict with one another, they

can provide us with a deeper understanding of this situation. Firstly, a firm’s past performance

does influence the likelihood of a management change according to Furtado and Rozeff (1987).

Secondly, the finding of Jensen and Warner (1988) indicates that management turnover is

inversely related to share price performances. Thirdly, Bonier and Bruner (1989) find that in

2

distressed firms, a top management change will come with an abnormal return of 2.48% on the

previous day and the event date.

In order to explain the differential market reactions, scholars have also examined a

variety of explanatory variables. According to the company performance hypothesis proposed by

Warner, Watts and Wruck (1988), management turnover frequently happens to companies

experiencing continuous poor performances. Besides, the firm size hypothesis suggests that new

CEO announcement can be more powerful in small-size companies. Moreover, a Forbes article

in January 2014 points out that attractive CEOs can boost companies’ stock prices after the

hiring announcements. Other studies also suggest that market reactions to a new CEO

announcement may depend on the types of CEO departures, forced or voluntary. Furthermore,

new CEO’s gender hypothesis proposed by Lee and James (2007) highlights that the

announcements of female CEO appointments may evoke negative stock price reactions.

In addition, the majority of empirical studies believe that the market may react differently

depending on whether an internal or external candidate is nominated as CEO, so we conduct a

subgroup analysis based on two scenarios identified in the research done by Dherment-Ferere

and Renneboog. On one hand, in poor past performing firms, the nomination of an external CEO

following the performance-related forced resignation may trigger a stronger positive market

reaction, whereas internal promotion following poor performance and forced resignation may not

be regarded favorably by the market. On the other hand, in well-performing companies with

voluntary resignation, the nomination of an internal successor may create a less negative market

reaction because the loss of company-specific human capital at the departure of the CEO is less.

1.3 Hypotheses

We conduct our study to test the following hypotheses:

H1: New CEO announcement is a market-moving event.

H2: The company’s past performance has an influence on cumulative abnormal returns.

H3: CEO succession announcements in small-size companies may trigger a stronger market

reaction.

H4: Better-looking new CEO may have a positive effect on stock prices.

3

H5: Market may react more positively to a forced resignation.

H6: The nomination of a new female CEO may evoke negative stock price response.

H7: Origin of CEO succession is correlated to abnormal returns.

2. Data and Methodology

The 50 firms are randomly chosen from firms publicly traded in NYSE and NASDAQ,

which have announcements of CEO succession during recent five years from 2009 to 2013.

2.1 Data and Methodology of CAR

2.1.1 Model Introduction

We conduct our event study analysis based on the “Market Model”:

Rj = αj + βj × Rmt + εj

In terms of market model, abnormal return is the difference between actual return and

predicted return. The event day is the day when firm initially issues an announcement of naming

new CEO on official websites. We define this day as Day0, the one trading day before and after

Day0 as Day-1 and Day+1 respectively. These consist of event window. Estimation window is the

period one year prior to Day-2 till Day-2.

2.1.2 Data Source

Daily Holding Period Return (RET) and Value Weighted Average Market Return

(VWRETD) are two parameters representing Actual Return of each firm and Average Market

Return respectively, and they are obtained from Wharton Research Data Services (WRDS),

CRSP daily stock files. The date range of data includes both estimation window and event

window.

2.1.3 Procedures of Data Analysis

(1) A regression analysis is performed, with VWRETD as the independent variable daily market

return, and RET as the dependent variable daily actual return of firm, to calculate α and β of each

firm. Estimation window is used as our date range. In the regression result, the value of intercept

corresponds to the value of α, and value of x variable refers to value of β.

4

(2) Predicted Returns (PR) of the three days event window are calculated respectively based on

the Market Model,

PR_Day-1 = αj + βj × VWRETD_Day-1

PR_Day0 = αj + βj × VWRETD_Day0

PR_Day+1 = αj + βj × VWRETD_Day+1

(3) Abnormal Returns (AR) during event window are obtained:

AR_Day-1 = Actual Return_Day-1 – PR_Day-1

AR_Day0 = Actual Return_Day-1 – PR_Day0

AR_Day+1 = Actual Return_Day-1 – PR_Day+1

In which, Actual Return is represented by RET.

(4) CAR during event window is the sum of Abnormal Return during event window (Day-1 to

Day+1):

CAR(-1,0) = AR(-1) +AR(0)

CAR(0,1) = AR(0) +AR(1)

CAR(-1,1) = AR(-1) +AR(0) +AR(1)

(5) T-test

A descriptive statistical analysis of CAR(-1,1) of all 50 firms is conducted. T-statistic is

calculated based on the results of descriptive statistical analysis:

In the formula, x bar refers to sample mean, μ refers to population mean, which is 0 in this case,

s refers to standard deviation, and n refers to sample count.

(6) P-value is calculated based on the value of t-statistic and use of TDIST function:

P-value = TDIST(t-statistic, n-1, 2)

2.2 Data and Methodology of Variable Analysis

5

2.2.1. Data Collection of Primary Variables

According to the statistics results, the stock returns change abnormally when companies

announce the new CEO succession through their official websites. In this event study, the

company’s past performance, firm size, the new CEO’s facial attractiveness, types of

management departure, new CEO’s gender, and the origin of successor are examined as the

primary variables.

Our sample data is mainly subtracted from the WRDS and the 50 firms’ official websites.

We get the data of quarterly net income and total assets from Compustat (North America

Fundamentals/Quarterly file) to calculate the ratio of ROA as the measurement of company’s

past performance; we also retrieve the data of daily stock price and number of shares outstanding

from CRSP to compute market cap as the measurement of firm size. When evaluating new CEOs’

facial attractiveness, we primarily rely on Google.com image searches and then use the

Anaface.com, a facial beauty analysis website, to compute the Facial Attractiveness Index for 50

new CEOs. The information of CEO’s gender, origin of successor, and the types of departure are

all captured from the news release on companies’ official websites. Table 3 provides the details

about the definitions of explanatory variables.

2.2.2 Data Filtering

In this section, we focus on three variables, including the company’s past performance,

forced or voluntary resignation, and internal or external succession. Based on the research

conducted by Dherment-Ferere and Renneboog, we determine to analyze differential market

reactions to new CEO announcement under two scenarios. The first scenario is that in company

with poor past performance which has led to CEO resignation, the nomination of an external

CEO may trigger a stronger positive market reaction. The second scenario is that in company

with sound performance and voluntary resignation prior to retirement age, the nomination of an

internal successor may be held more favorably by the market.

Therefore, we choose internal or external succession as the explanatory variable. As our

sample includes 50 firms whose situations may vary, we choose past performance and forced or

voluntary resignation as our filters and develop two subgroups of data. Under the first scenario,

the subgroup includes companies with poor past performance and forced resignation. While

6

under the second scenario, the subgroup includes companies with good past performance and

voluntary resignation. Then, we run the regression on CAR over internal or external succession.

3. Empirical Results

3.1 Interpretation of Analysis of CAR

Following the procedure explained in previous section, we get a result of t-statistic and p-

value of all 50 firms in our sample (See Table 1). However, the result of both t-statistic and p-

value are not good enough to show the correlation to abnormal returns on and after

announcement date. Besides, there is even an error to get the p-value of CAR(0,1), due to a

negative mean value. A probable reason for the result is that a firm in our sample has a very

strangely different abnormal return from the other 49 firms. ELECTRONIC ARTS INC, firm

#50, has a quite large negative abnormal return during the 3-day event window.

We draw a trend line chart and find that all CARs are in a range from -0.2 to 0.2, except

the CAR (-0.470561307) of ELECTRONIC ARTS INC, which has been circled in Figure 2. Due

to the huge difference of CAR value, we consider it as an outlier and thus delete the firm from

our sample.

With the rest 49 firms, we re-conduct the procedures again, and get the new t-statistics

and p-value shown in Table 2.

In the new 49-firm sample, the average CAR shows a roughly 1.5% abnormal return on

each day during the event window. The new p-value is 6.26%, which means that new CEO

announcement induces a market movement with a 93.74% certainty. The result falls within the

range of 0.05 to 0.1, which is a certainty level not very excellent but reasonable to show the

influence of new CEO announcement on the market reaction. Hence, we consider new CEO

announcement as a market-moving event.

3.2 Interpretation of Explanatory Variables

When analyzing the underlying factors driving differential market reactions, first of all,

we examine the result of regression on CAR over the primary variables. Then, as the result is not

statistically significant, we determine to filter our sample based on two variables forced or

voluntary departure and company’s past performance, and examine the relationship between

7

CAR and the origin of successor under two specific scenarios. Therefore, the first part of the

analysis focuses on examining the three variables: new CEO appearance, firm size, and gender,

while the second part of the analysis emphasizes on the rest three variables: origin of successor,

the types of departures, and company’s past performance.

3.2.1 Analysis of Primary Variables

As we can see in Table 4, the p-values of six primary variables are larger than 10%, so

the result is not statistically significant. To be more specific, we get a p-value of 0.292427 for the

variable appearance which is larger than 10%, so we find no significant impact of the new

CEO’s appearance on the share price changes. We get similar FAI scores with the researches

from Halford and Hsu in 2013, but the final regression result is different. The potential factors

causing different result could be the selection of event date, sample size and observation

windows. To be more specific, their sample includes 677 chief executives and they measure the

companies’ share performance three days before and five days after the date when the CEOs’

images are revealed. According to their findings, there is a positive relationship between CEO

attractiveness and stock returns around new CEO’s announcements.

Moreover, the statistical result shows that there is little correlation between the share

price changes and the size of firms’ with the new CEO announcement. Our sample size is rather

small to develop a convincing statistical conclusion in terms of company’s size. As for the

variable gender, in contrast to some statistics findings, there is no substantial share price

movements in response to the announcements of new female CEO. In fact, a research conducted

by Xerox Corporation in 2011 finds that CARs during the three event days of female CEO

announcements are not significantly different from the male CEO announcements. This research

investigates a relatively large sample of 114 firms with female CEOs in S&P 500, whereas

findings of Lee and James (2007) are based on only 17 female CEOs in their sample.

3.2.2 Analysis of Origin of Successor

In firms which have poor past performances and forced resignation, an external CEO may

be hailed more favorably by the market in contrast to an internal successor (scenario one). As we

can see in Table 5, we get a p-value of 0.085123, which is less than the 10% threshold, indicating

that our result is statistically significant at the 10% confidence level. Therefore, internal/external

8

succession is correlated to abnormal returns. Furthermore, the coefficient of x variable (0.069089)

is positive, indicating that there is a stronger positive market reaction if the company nominates

an external candidate (external=1, Internal=0) (Figure 3). This is because an internal successor is

held partially responsible for past poor performance. Moreover, since the company’s existing

strategy is not working well, an external candidate is preferred as he may bring change and

revive creativity.

In well-performing companies with voluntary resignation, the nomination of an internal

successor may create a less negative market reaction (scenario two). The reason why the market

may react more favorably to internal successor is that an internal candidate understands the

company’s culture and is aware of the specific internal needs of the company. In addition, hiring

an outside CEO is relatively more costly than promoting an internal manager due to large pay

packages for outside recruits. As we can see in Table 6, the p-value is 0.838054 which is

significantly higher than 10%, so our result is not statistically significant. Nevertheless, the

coefficient of x variable (-0.005817) is negative, indicating that the market reaction is smaller if

the company nominates an internal successor (internal=1, external=0), which is in consistent

with our hypothesis.

4. Conclusion and Critiques

This study analyzes share price reactions to CEO succession announcement. A 93.74%

certainty of market movement is triggered by the new CEO announcement. Therefore, the

announcement of CEO succession is a market-moving event.

This paper also analyzes how different variables may affect market reactions, represented

by cumulative abnormal returns. Five of six variables in the analysis show no significant

correlation to abnormal returns. Under specific firm scenarios, the origin of new CEO (internal

versus external candidate) may cause differential market reactions. Our result shows that in

company with poor past performance and forced resignation, the nomination of an external

candidate indeed causes a stronger positive market reaction.

There are mainly two limitations in our analysis. Firstly, the sample size in our study is

too small when comparing with sample size in other academic papers, which contain a normal

sample size of 600 to 800 firms. In particular, when we are analyzing the two subgroups of data,

9

our sample becomes even smaller as only a few companies fit into the scenarios. Secondly, our

analysis is based on a multi-regression model, while many scholars conduct a more complex

model in their studies. We can get better results if we use a more complex model to analyze the

situation.

As future accounting professionals, we can learn real skills to provide an independent

evaluation on company’s CEO turnover and get a good understanding of company’s structure.

10

References

1. Furtado, Eugene P.h., and Michael S. Rozeff. "The Wealth Effects of Company Initiated

Management Changes." Journal of Financial Economics 18.1 (1987): 147-60. Print.

2. Jensen, Michael C., and Jerold B. Warner. "The Distribution of Power among Corporate

Managers, Shareholders, and Directors." Journal of Financial Economics 20 (1988): 3-24. Print.

3.Bonnier, Karl-Adam, and Robert F. Bruner. "An Analysis of Stock Price Reaction to

Management Change in Distressed Firms." Journal of Accounting and Economics11.1 (1989):

95-106. Print.

4. Dherment-Ferere, Isabelle, and Luc Renneboog. “Share Price Reactions to CEO Resignations

and Large Shareholder Monitoring in Listed French Companies.” Center for Economic Research

(2000): No. 2000-70. Print.

5. Lee, Peggy M., and Erika Hayes James. “She’-E-Os: Gender Effects and Stock Price

Reactions to the Announcements of Top Executive Appointments.” Darden Business School

Working Paper (2003): No. 02-11. Print.

6. Adams, Susan. "Do Attractive CEOs Really Boost Their Companies' Stock Prices?" Forbes.

Forbes Magazine, 07 Jan. 2014. Web. 20 Mar. 2014.

7. Halford, Joseph Taylor, and Scott H. C. "Beauty Is Wealth: CEO Appearance and Shareholder

Value." SSRN, 21 Nov. 2013. Web. 20 Mar. 2014.

11

Appendix of Table

Table 1. Cumulative Abnormal Returns (CAR) of 50-firm sample

No. Firm Name Event Date Car(-1,0) Car(0,1) Car(-1,1)

1 Apple Inc 8/24/2011 0.012066398 0.001832566 0.018551926

2 Bank of America 11/9/2009 0.064282 0.058479 0.06228

3 Best Buy 8/20/2012 0.000272 -0.00427 -0.00265

4 Barclays Plc 8/30/2012 -0.010314524 -0.00452234 -0.017550414

5 Bank of New York Mellon Corp 12/10/2013 0.017394186 0.001662657 0.003498453

6 Citigroup Inc 10/16/2012 0.035424654 0.016753908 0.056772426

7 Chevron Corp New 9/30/2009 0.013265293 -0.004307427 0.005479553

8 Deutsche Bank A G 11/1/2012 0.029349214 -0.00679599 0.031796029

9 First Niagara Finl Group Inc Ne 12/19/2013 -0.056682776 -0.040434605 -0.04484122

10 General Motors Co 12/10/2013 0.005973457 0.001291842 0.016216695

11 Groupon 8/7/2012 0.050403776 0.041969425 -0.015951073

12 Harley Davidson Inc. 4/8/2009 -0.004616661 0.103089279 0.070072909

13 Hewlett Packard Co 9/22/2011 0.083859645 -0.038253659 0.059489984

14 International Business Machs Co 10/25/2011 -0.006713221 0.00259554 -0.007073004

15 Intel Corporation 5/2/2013 0.010226954 -0.012205869 0.00266892

16 Lockheed Martin Corp 11/9/2012 -0.006952681 -0.00274402 -0.009224981

17 Massmutual Corporate Invs Inc 12/30/2009 0.008617534 -0.008888881 0.013064146

18 Morgan Stanley 9/10/2009 0.034446569 0.034257067 0.01892876

19 Netapp Inc 8/19/2009 -0.007285583 -0.078135041 -0.078529241

20 Pepsi Co 3/12/2012 0.1476641 0.117379786 0.085187289

21 Rite Aid Corp 1/21/2010 0.057918876 0.045733048 0.057768166

22 Sandridge Energy Inc 6/19/2013 -0.001366809 -0.020034229 -0.028949426

23 Silicon Graphics, Inc. 2/23/2012 0.002942 0.010586 0.004759

24 Siemes 7/31/2013 0.005009933 0.006687638 0.003476758

25 Stryker Corp 10/1/2012 -0.014322275 -0.021327752 -0.019463626

12

26 Symantec Corp 7/25/2012 0.130168494 0.146096245 0.140366923

27 Union Bank of Switzerland 11/16/2011 -0.010627493 -0.019943914 -0.036580232

28 Verizon Communications Inc 7/22/2011 -0.026006307 -0.035332993 -0.037360536

29 Xerox Corp 5/21/2009 0.031609677 0.003028322 0.026208245

30 American International Group Inc 8/3/2009 0.001101676 -0.005151408 -0.005116175

31 Advanced Micro Devices Inc 8/25/2011 -0.013810401 0.022936904 -0.017485692

32 Aol Inc. 12/4/2009 0.002817143 0.01279735 0.004046039

33 Avon Products Inc 4/9/2012 0.010033353 -0.024823921 0.005805162

34 Boston Scientific Corp 9/13/2011 -0.009154341 -0.001752094 0.007057925

35 E-Trade Financial Corporation 1/17/2013 0.001322761 0.016096449 0.027589942

36 Green Mountain Coffee Roasters I 11/20/2012 0.107430487 0.014284706 0.10133127

37 Hologic Inc 12/9/2013 -0.024515198 -0.002834979 -0.01828989

38 Penney J C Co Inc 6/14/2011 0.164259164 0.144035714 0.151662708

39 Lululemon Athletica Inc 12/9/2013 -0.015548689 -0.00756471 -0.028912288

40 Nokia Corp 9/10/2010 0.019695603 0.023412294 0.027498265

41 Rogers Communications Inc 9/12/2013 -0.011134324 -0.005771876 -0.006654644

42 Radioshack Corp 2/7/2013 -0.006382078 0.080206225 0.091288749

43 Sears Holdings Corp 1/7/2013 0.007424773 -0.039902344 -0.053661201

44 Ulta Salon Cosmetics & Frag Inc 6/24/2013 0.05189607 0.042641855 0.04990449

45 Weyerhaeuser 6/16/2013 -0.009210255 -0.076729614 -0.036373191

46 Yahoo Inc 7/16/2012 -0.014849663 -0.013384985 -0.024003492

47 Zynga Inc 7/1/2013 0.07881905 0.167045524 0.141505397

48 Qualcomm Inc 12/13/2013 -0.004409806 -0.005713438 0.168616527

49 Blackberry Ltd 8/20/2012 -0.190692781 -0.138620124 -0.159848033

50 Electronic Arts Inc 3/18/2013 -0.438044037 -0.501164553 -0.470561307

Average 0.006061099 -0.000114228 0.00667626

T-Statistics 0.51340638 -0.00889 0.518088

P-Value 0.60997436 Error 0.606728

13

Table 2. T-test and P-value of CARs of 49-firm sample

CAR(-1,0) CAR(0,1) CAR(-1,1)

Average 0.015124469 0.010111288 0.016415802

t-Statistics 1.9588824 1.27489 1.906165

p-Value 0.0559498 0.208485 0.062626

Table 3. List of Explanatory Variables

Measurement Variable Source of Data

Past Performance Return on Assets

NIQ/ATQ (Net Income/Total Assets)

Good = Positive Sign

Bad = Negative Sign

Compustat

Facial Attractiveness Index Anaface Evaluation Rating out of 10 Anaface.com

Size Market Capitalization ABS (Price*Shares outstanding) CRSP

New CEO's Gender Female or Male Female=1,Male=0 Firm's Official

Websites

Origin of Successor Internal or External

Succession

External=1, Internal=0 (scenario 1);

Internal=1, External=0 (scenario 2)

Firm's Official

Websites

Type of Departure Forced or Voluntary

Resignation Forced=1, Voluntary=0

Firm's Official

Websites

Table 4. Regressions of CAR(-1,1) over Explanatory Variables

Coefficients t-Statistics p-Value

Size -0.00712 -0.52495 0.602668

Past Performance 0.012956 0.678364 0.501652

14

FAI -0.01106 -1.06762 0.292427

Types of departure 0.028801 1.65238 0.106698

Gender 0.000309 0.014427 0.988565

Origin of Successor -0.00895 -0.4905 0.6266

Adjusted R Square -0.02535

N 45

Table 5. Regression of CAR over Internal/External Succession

Scenario One Coefficients t-Statistics p-Value

Internal/External Succession 0.069089 2.003938 0.085123

Adjusted R Square 0.273768

N 9

Filter: Poor Prior Performance & Forced Resignation

The market favors external succession.

Table 6. Regression of CAR over Internal/External Succession

Scenario Two Coefficients t-Statistics p-Value

Internal/External Succession -0.005817 0.208869 0.838054

Adjusted R Square -0.079409

N 14

Filter: Good Prior Performance & Voluntary Resignation

The market favors internal succession.

15

Figure 1.

This figure presents a screen shot of anaface.com. The photograph is CEO of Yahoo,

Marissa Mayer, by Google.com.

Figure 2. Trend line of CARs of 50-firm sample

-0.6

-0.4

-0.2

0

0.2

0.4

1

5

9

13

17

21

25

29

33

37

41

45

49

Value of CAR

Number of Firms

Trend Line of CAR(-1,1)

Trend Line

16

Figure 3. Correlation between CAR and Internal/External Succession

Figure 4. Correlation between CAR and Internal/External Succession