CEO Turnover: Transparency of Announcements and the Outperformance Puzzle

44 Pages Posted: 20 Aug 2015 Last revised: 22 Feb 2018

See all articles by Paul Farah

Paul Farah

La Trobe University - Faculty of Business, Economics and Law

(Michael) Hui Li

La Trobe University

Lily Nguyen

The University of Queensland - UQ Business School

Date Written: August 20, 2015

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 non-performance. 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 turnovers, CEO performance, Internal Conflict, Reason for departure

JEL Classification: G14, G30, G34, M51

Suggested Citation

Farah, Paul and Li, (Michael) Hui and Nguyen, Lily, CEO Turnover: Transparency of Announcements and the Outperformance Puzzle (August 20, 2015). Available at SSRN: https://ssrn.com/abstract=2647838 or http://dx.doi.org/10.2139/ssrn.2647838

Paul Farah (Contact Author)

La Trobe University - Faculty of Business, Economics and Law ( email )

Victoria 3552, 3086
Australia

(Michael) Hui Li

La Trobe University ( email )

Department of Economics and Finance
La Trobe University
Melbourne, 3086
Australia

Lily Nguyen

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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