CEO Turnovers: Transparency of Announcements and the Outperformance Puzzle

Paul Farah and Hui Li
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Paul Farah: Department of Accounting and Finance, Notre Dame University-Louaize, Zouk Mousbeh 25126, Lebanon
Hui Li: Department of Economics and Finance, La Trobe Business School, La Trobe University, Melbourne, VIC 3086, Australia

IJFS, 2021, vol. 9, issue 3, 1-22

Abstract: This study investigates market reactions to announcements of CEO turnover and finds that forced turnovers are not accompanied by positive returns, which contradicts the broad view that firing a CEO sends a positive signal to the market. This contradiction is further explored by focusing on the nature of not only turnover but also a firm’s past performance. This study finds that the market seems to incorporate both types of information in reacting to CEO turnover announcements. Firing an underperforming CEO is viewed as a positive signal, whereas firing an outperforming CEO is viewed as a negative signal. Rather than taking early action against CEOs for a deterioration in their performance, firms appear to be firing outperforming CEOs owing to their apparent nonperformance-related reasons. This study also explores reasons behind the decision to fire a CEO from different news databases and finds that giving no clear reasons for a CEO’s departure increases uncertainty in the market, thereby causing a negative market reaction. However, stating performance as the reason for the departure assures investors about the future trajectory of the firm and results in a positive market reaction.

Keywords: CEO turnover; CEO performance; internal conflict; reason for departure (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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